A couple of global leaders toppled over the weekend. What is the connection between the coup that apparently has deposed Mikhail Gorbachev from the topmost pinnacle of the Soviet Union and the symbolic defenestration of John Gutfreund as chairman of Salomon Brothers Inc., perhaps the loftiest trading and investment bank in the world?

Certainly it is not the one that is popularly drawn: capitalism in disarray, even in the hour of its greatest triumph.

Instead, events in New York offer an object lesson as to what has gone so very wrong in Moscow.

The putch of the Russian cops and generals represents the sad new chapter in the winding-down of a great experiment. The Russian Revolution of 1917 was a moment of electric hope in the history of the 20th century.

It represented the adoption of what Adam Przeworski has called "That particular blueprint that congealed in Europe between 1848 and 1891: rational administration of things to satisfy human needs." It was a blueprint that has captivated many of the best-intentioned minds of several generations. It may still serve well on a less ambitious scale.

Seventy five years later, however, it is clear that the revolution failed in large part because of its inability to renew itself, to resolve its conflicts regularly under unchanging rules. In failed because it was profoundly undemocratic and antagonistic to change.

Political parties in the Soviet Union don't exist to lose elections, managers generally don't fear the loss of their jobs, laws are not made to be obeyed. People grumble, but they don't really expect to exert control.

In contrast, when New York Federal Reserve Bank president Gerald Corrigan called Salomon's chairman Gutfreund for a second time last Friday, it was a sure thing that the 61-year-old bond trader would soon leave his job as quickly as if he had climbed out the window.

Leadership of the firm abruptly shifted to an ousider from Omaha, Nebraska -- Warren Buffett -- and seemed likely to devolve eventually on a 43-year-old officer of the firm who until last week had been managing its Tokyo office. Deryck Maughan was quickly boosted to the outside world as "Mr. Integrity," according to the usual recipe.

The whole thing required one newspaper article, two phone calls and a certain amount of high-stakes backstage maneuvering.

The point is that leadership shifted quickly and unequivocably from one faction on Wall Street to another. The clique that had run Salomon was out; a new and less-connected clique was in. The firm's capital base was threatened briefly as it prepared to roll over a series of IOUs before the Treasury Department steadied the Street.

Wall Street buzzed with speculation about who had put the blocks to "Solly," and why. Certainly it was not a pair of reporters for The Wall Street Journal, acting entirely on their own. Many firms stand to benefit from a diminution of the power of the 40 large "primary dealers" -- investment and commercial banks -- who make the market for US government debt. And so the spotlight was brought to bear on the US Treasuries market.

But the deed was done, and quickly. The losers now are free to fight back, to hire "spin doctors," to plant counterleaks, to retain lawyers and lobbyists, to compete ever harder in the international bond markets.

In contrast, tanks rolled through the Moscow streets yesterday as citizens assimilated the news that -- not some obscure bond covenant or an arcane government regulation -- but the Soviet Constitution itself had been breached in its most fundamental particular. Lies were manufactured and broadcast, as the nation's ruling elite prepared to dig in, by force of arms.

It is precisely this freedom of many different political and economic competitors to contend in a stable institutional framework that has rendered the US capital markets the broadest and deepest in the world. It insures that they will remain so, at least for the foreseeable future. The Salomon scandal is just another proof of how relatively well the system works.
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Securities and Exchange Commission Chairman Richard C. Breeden said in a letter released yesterday that the silence of Salomon Brothers Inc. executives, after learning of their firm's misdeeds in government bond auctions, raised "serious questions about whether there was a climate within Salomon that appeared to tolerate or even to encourage wrongdoing."

Breeden said that "one of the most troubling aspects" of the Salomon case was that senior executives knew about violations of government bidding rules as early as April - and violations that occurred again in May - and yet they failed to take action.

"Only after the firm had received information requests from our division of enforcement and became aware of the commission's investigation did senior management choose to act," Breeden said.

Breeden's comments came in a letter to Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate securities subcommittee, in response to questions raised by Dodd.

Breeden is expected to detail his views when he testifies today at the House subcommittee on telecommunications and finance headed by Rep. Edward J. Markey (D-Mass.).

Salomon admitted in August that on several occasions it bought more government securities than it was permitted. It also acknowledged that the firm put in bids for customers without their knowledge.

Breeden, meanwhile, issued a warning to the heads of other firms to establish strong codes of ethical behavior at their companies.

"It is not an adequate ethical standard for a financial firm simply to avoid indictment," he said.

"Where problems do occur, however," Breeden added, "it should be seen as the personal obligation of every chief executive to make an immediate and full investigation of the possible wrongdoing, to report it promptly to the appropriate regulatory bodies and to seek to take corrective action."

The lead witness at Markey's hearing today will be Warren E. Buffett, who was named chairman of Salomon Brothers after Chairman John Gutfreund and other top executives were forced to resign.

The Salomon bidding violations are the subject of a three-pronged investigation by the SEC, the Treasury and the Justice Department.

After Buffett testifies about the events at Salomon, the committee will hear from Breeden and representatives of the Treasury and the Federal Reserve.

Letters and reports from the three agencies to Dodd were released last night by his committee.

Of the investigation that is underway at the SEC, Breeden said his agency has issued more than 135 subpoenas and requests for information about the workings of the Treasury auctions.

He said these requests have gone to all 40 primary dealers in government securities and to many of their customers and employees.

A primary dealer is a bank or securities firm that works with the Treasury and the Federal Reserve in at least two key ways: The primary dealer is obligated to bid at auctions on Treasury securities. And the primary dealer serves as the pipeline through which the Federal Reserve buys and sells securities as it manages the nation's monetary policy.

Breeden was effusive in his praise of Buffett and of Salomon's new chief operating officer, Deryck Maughan, and their efforts to clean up the problems at Salomon.

"They have committed to help us uncover all transgressions that may have occurred and they have pledged to discharge any individual found to have participated in any misconduct. In addition, they have represented that they will review and revise all of the firm's policies and procedures so as to prevent a recurrence of these problems," Breeden said.
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August 10, 1987, Post-Tribune (IN) Jay F. Higgins Named Head of Corporate Finance for Salomon Bros.
JAY F. HIGGINS, 42, A FORMER GARY RESIDENT, HAS BEEN NAMED HEAD OF CORPORATE FINANCE FOR SALOMON BROTHERS INC., ONE OF WALL STREET'S LARGEST SECURITIES FIRMS. MOST RECENTLY, HIGGINS WAS HEAD OF THE COMPANY'S MERGER AND ACQUISITION DIVISION. HIGGINS, WHO NOW LIVES IN NEW YORK, IS IN CHARGE OF THE COMPANY'S CORPORATE, MUNICIPAL AND MORTGAGE FINANCE DEPARTMENTS. HE GRADUATED FROM ANDREAN HIGH SCHOOL IN 1963 AND RECEIVED HIS UNDERGRADUATE DEGREE FROM PRINCETON IN 1967. HE BEGAN WORKING FOR SALOMON BROS. THAT YEAR. HIGGINS RECEIVED HIS MBA FROM THE UNIVERSITY OF CHICAGO.

HOUSTON - Still subject to judicial review and untold appeals, Pennzoil Co.'s $10.53 billion judgment against Texaco Inc. has by its enormity stunned the nation's business community.

On paper, the judgment exceeds the curret market value of Texaco's outstanding common stock by almost $2 billion. A prominent Houston attorney said, "It will be years before this one gets out of the courts."

Meanwhile, Pennzoil enacted a "&osition pill" of sorts aimed at channeling whatever settlement revenues that might eventually reach its stockholders to them rather than an opportunistic corporate raider.

One Pennzoil spokesman told The Oil Daily: "If someone thinks they can buy us and get to that money, they have another 'think' coming."

To the foreman of the state district court jury that unanimously awarded the highest such settlement in U.S. judicial history, the verdict should prove to the business world that the manner by which Texaco preempted Pennzoil in acquiring Getty Oil Co. nearly two years ago "is not the way you conduct business."

The verdict in no way disturbs the already finalized $10.2 billion acquisition of Getty by Texaco, a transaction in which Texaco indemnified Getty from any resulting damage claims.

Jury's Feelings

Richard V. Lawler, a Katy, Texas, forklift salesman, said the eight women and three other men on his panel each expressed their feelings as to the size of the award.

"They were in basic agreement about the issues from the start" of their deliberations, said the jury foreman, who moved to the Houston area just four years ago from Allentown, Pa. He conceded there was initial disagreement among the jurors as to the size of the judgment.

There was indications that the jury's message was heard, if not by the nation's business community then at least by Wall Street, which immediately placed Texaco's stock under pressure.

It also was heard in the courtroom by a disbelieving Texaco Vice Chairman James Kinnear, who said: "This is not the final adjudication of this matter. I don't think the findings are supported by the preponderance of the evidence."

Also present in District Judge Solomon Casseb's court for the verdict was Pennzoil Chairman J. Hugh Liedtke, who called the jury's decision a landmark demand for integrity and morality in business dealings.

The effect of the verdict and its mountainous dollar judgment on future acquisition and merger activity remains to be seen.

E.F. Hutton's Warren Edmundson believes the Pennzoil-Texaco case may well change the way in which the business community handles future merger agreements. "They'll certainly be more cautious of handshake agreements," he added.

On the other hand, Morgan Stanley's chief of mergers and acquisitions, Eric Gleacher, terms the case "an exception" that will not affect future merger activity.

At Solomon Brothers, which served as advisors to Getty in the acquisition, Jay F. Higgins said the settlement award -- which he termed "unbelievable" -- might eliminate all future "agreements in principle" announcements.

In any event, the next chapter in the drama unfolds Dec. 5-6 when attorneys for both sides enter motions relative to the jury verdict before Judge Casseb.

Lead Texaco attorney Richard B Miller has already said he will move to have the verdict set aside. "We don't like what happened and we're going to try to get it changed," he added. Pennzoil attorney Joe Jamail said his brief will seek a judgment approving the jury verdict.

Appeals Process

Should the latter prove true, Texaco would have 30 days in which to file for a new trial, a foregone conclusion in the eyes of Houston's legal community.

Should that motion be overruled, Texaco could then turn to the Texas appellate court. This action, however, would require the posting of bond by Texaco covering the amount of damages, interest, expenses and court fees.

The sheer size of such a bond might prove an insurmountable stumbling block.

Texas lawyers note the state's courts are averse to tampering with jury verdicts that are based on fact. They say Texaco's most productive line of action might be based on procedural and legal errors.

Lawler said the jury decision on actual damages was based on Pennzoil's claim that it would have to spend more than $10 billion to find the 1 billion equivalent barrels of oil it would have taken over for $2.7 billion had its merger agreement with Getty been finalized. Pennzoil's quest for some $7.5 billion in punitive damages was pared to about $3 billion by the jurors.

Within hours of the Tuesday verdict, Pennzoil's board of directors approved a special preferred stock issue -- with a dividend rate and redemption prices keyed to the proceeds of the lawsuit, "when collected" -- which Pennzoil stockholders may purchase.

Pennzoil's J. Hugh Liedtke said the action guarantees that the company's shareholders, "and not an opportunitistic raider," will benefit from the court action.
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NEW YORK -- Salomon Brothers Inc. is regaining big clients who defected after the firm's Treasury bond scandal, but the effects of a corporate makeover under chairman Warren Buffett are still playing out on Wall Street.

In the nearly five months since it admitted widespread wrongdoing in the government bond market, Salomon has laid off scores of executives, slashed employee bonuses, restructured management and refocused business lines.

Salomon's stock price has rebounded, a flood of negative publicity has diminished and major investors such as the World Bank and California's large pension fund have restored relations with the firm.

But some Wall Street executives believe the death of the old Salomon -- a brash, adventuresome risk-taker -- and its replacement by a leaner, more cautious firm means Salomon could lack the tools to remain a Wall Street power.

"They've gained some confidence in the last months with clients coming back," Gary Goldstein, president of The Whitney Group, an executive search firm, said yesterday. "But I don't think it's enough to overcome the concerns at the firm that most people have about what's going to happen in the next couple years."

For starters, Salomon in early 1992 is expected to receive its punishment for submitting unauthorized bids for Treasury securities at least eight times. The firm also admitted exceeding limits on securities purchases at a single auction. Salomon is cooperating with federal investigators.

Salomon has set aside $200 million to pay settlements, fines and other costs of the scandal, and the announcement of penalties once again will bathe the firm in bad publicity. Former Salomon executives who resigned in disgrace also are expected to face criminal and civil charges.

Despite the imminent penalties, Buffett, the multibillionaire Nebraska investor, has worked to reform Salomon's internal operations and distance it from old leaders, especially former chairman John Gutfreund.

A new management committee shunned executives close to the old regime, including the longtime head of equities, Stanley Shopkorn. The appointment of 22 new managing directors -- a senior post -- underscored a focus on Salomon's bond business.

The two main targets of the realignment have been stocks and investment banking. Salomon has laid off about 140 bankers, stock traders and analysts in recent weeks, mostly because of poor profitability at the departments.

Salomon officials concede the loss of senior executives could hurt the firm's relationship with clients. In addition, the scandal has reduced its effectiveness in underwriting corporate stocks and bonds, a major business.

Before the scandal, Salomon was No. 3 among Wall Street firms in underwriting. Since then it has fallen to No. 7. This month, Salomon has garnered a measly 1.6 percent of the underwriting market.

"The bankers I've talked to are concerned they are not going to have enough products, capital or tools to compete as effectively with some big firms," Goldstein said.

But Salomon spokesman Robert Baker denied the firm is focusing on its core bond business. He said Salomon hoped to overcome the loss of senior banking executives -- which could hurt the firm's stature and deal-generating capacity -- with its reputation and talent, and by treating customers well.

"We have an obligation to ourselves and to our clients to do our business profitably," he said.

It's still unclear whether such changes will reduce the firm's effectiveness.

"We do have some concerns," said DeWitt Bowman, chief investment officer for California's Public Employees Retirement System, which lifted a ban on Salomon's government bond business last week. "(Any time) you go through a change of a climate . . . you wonder what it's going to do to the organization,"

"Time will tell," he said. "There certainly is some potential for it to change. Salomon . . . did some things quite well. We certainly hope they retain those abilities."

Changes in auditing and operational structure of the government bond unit persuaded the California fund, known as Calpers, which has assets of about $65 billion, to rescind its ban.

But Salomon also lobbied Calpers, the biggest and most influential state pension fund. Buffett appeared before its board, and he and new Salomon chief operating officer Deryck Maughan repeatedly spoke with top Calpers executives.

Before it lifted the ban, Calpers received assurances from the Securities and Exchange Commission there were no reasons not to.

Massachusetts' employee and teacher pension fund resumed doing business with Salomon in all areas except government securities.

"We have a comfort level now that senior management in place is really focusing on maintaining an ethical working environment and ethical standards," said Steven Kaseta, deputy treasurer for Massachusetts.

But the state is awaiting the outcome of SEC, Justice Department and Federal Reserve investigations before resuming Treasury business with Salomon. "We do not want to put ourselves in a position of dealing with a firm that has compromised both themselves and the ethics of the US Treasury market," Kaseta said.
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Salomon Inc. recently spent a hammockful of money on a Wall Street Journal centerfold that interim chairman Warren E. Buffett might do some bragging, some apologizing, and some explaining. It is hard to understand why Salomon Inc.'s advertising agency was unable to rescue its client from the eighth-grade error in grammar that sat for all to deplore in the last paragraph, right above The Great One's signature: "The best decision I have made since assuming my post was my appointment of Deryck Maughan as Chief Operating Officer.... He, along with the management of Philbro, join me in a pledge to make Salomon (a better outfit)."

Once again Words Into Type has the answer: "The number of the subject and verb is not affected by intervening words introduced by with, together with, including, as well as, no less than, plus, and similar expressions." Here is the example WIT shows that matches Buffett's fluff- "The load of ore, together with ... the pig iron, was delivered on time." Similarly, "He ... joins me in a pledge."
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The government plans to seek stiff sanctions, including a large fine, against Salomon Brothers Inc. for its illegal bidding at U.S. Treasury auctions, according to sources familiar with the case.

The government is nearing the end of its investigation of the affair and the penalties are likely to be significant even though Salomon Brothers calculated that it earned less than $5 million in profits from the improper bids, the sources said.

One source familiar with the investigation said the authorities have doubts about Salomon's estimates and would be foolish to accept them at face value. The source said that in any case the government also will consider much more than Salomon's profits in setting the penalty. An important factor will be a calculation of the risks that the company's actions posed for the entire $2 trillion government bond market, the source said.

A spokesman for Salomon said the company was "confident" of the accuracy of its calculations. The company has already taken a $200 million charge against its profits in anticipation of all fines, penalties and other costs related to the affair.

It is unclear how the timing of a settlement with the company might affect other, related legal inquiries in the case. Several individuals implicated in the wrongdoing - especially Paul Mozer, the bond trader who Salomon said submitted false bids at Treasury auctions from July 1990 through May 1991 - are expected to seek legal settlements of their own.

One crucial question is whether the government will require Salomon Brothers to plead guilty to one or more felonies as part of the price of settling the case, sources said.

The company admitted last August that a senior bond trader used the names of customers without their knowledge to bid for Treasury securities, and the firm as a whole may be held liable for his actions. But Salomon Brothers hopes that its extensive cooperation with the government since it disclosed the wrongdoing, and its replacement of the top executives who failed to halt the abuses, will lead the authorities to stop short of seeking a felony charge against it, sources said.

While the government certainly will give Salomon credit for its cooperation, authorities view the wrongdoing as very serious and believe it potentially threatened the nation's largest securities market, sources said.

Salomon Brothers fears that it might be put out of business altogether if it pleaded guilty to a felony, both because its lenders might cut it off from financing and because some clients such as state pension funds might stop doing business with it, sources said.

"We don't believe that anyone in government has any desire to see us go out of business. We believe that whatever the outcome may be with the government, it will be something that we will survive," Salomon Brothers Chairman Warren E. Buffett said.

There are other risks as well. Salomon Brothers President Deryck Maughan warned Congress last September that harsh punishment of Salomon could threaten the health of the financial system.

Investigators from the Securities and Exchange Commission and the Manhattan U.S. Attorney's office are still taking testimony from witnesses and have not reached the stage where they can approach Salomon Brothers with a proposed settlement.

But a source familiar with the investigation said it was close to conclusion and that a settlement with the company might be reached as early as April. Salomon Brothers is eager to put the affair behind it and would be very pleased if that timetable could be met.

Once the government proposes a settlement, Salomon Brothers will be under considerable pressure to accept it, according to lawyers and other experts. The firm has essentially bet its future on its cooperation with the government and it could lose that good will if it chose to fight.

"Salomon will have to settle. They cannot afford to litigate against the federal government," said a former senior SEC official.

The government's doubts over Salomon's calculation of the profits it made from the illegal bidding could affect the penalties the company faces. The profit estimates not only will influence the amount of any fine, but also will affect the host of investor lawsuits that have been filed so far.

In October, shortly before Salomon released its estimates, the government put the firm's profits from the May auction of two-year notes at more than $30 million, sources said. The firm's estimate was between $16.7 million and $18.4 million, which Salomon said did not result from illegal bidding.

If the government determines that the profit numbers are significantly higher than Salomon stated, then it could undercut the good will built up with government investigators.

Many on Wall Street have also questioned Salomon's profit estimates. "Those numbers didn't sound like enough money to me," said a former senior Salomon Brothers executive. He was particularly suspicious about the company's data, because it suggested that Salomon made less money in auctions where it had cornered the market than when it hadn't.

Salomon stands by its numbers. "We are confident of our numbers and our analysis, and we are aware of no critique of the report furnished to the government," a Salomon spokesman said.
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Salomon Brothers Inc. said Friday it believes the federal government will soon conclude an investigation into Salomon's illegal bidding in Treasury bond auctions.

But Salomon executives would not say what they think the Justice Department and the Securities and Exchange Commission will do.

Salomon interim Chairman Warren Buffett and Chief Operating Officer Deryck Maughan gave securities analysts and institutional investors a report on where the investment firm stands. They asserted the firm, one of the biggest on Wall Street, was strengthening and would survive the trauma caused by the bond trading scandal.

Buffett and Maughan said Salomon was also seeking to improve the performance of all divisions, by setting profit targets for each line of business and more directly linking executive pay to the performance of the divisions.
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William Aramony was forced out of the presidency of the United Way for making $463,000. That was small pickings. He pales next to Lee Iacocca, Robert Stempel and Harold Poling. They made a combined $8.4 million in 1990 as CEOs of Chrysler, GM and Ford, respectively. Yet they lost their companies a combined $7.5 billion in 1991.

Or take Steve Ross of Time Warner in New York. He made $78.2 million in compensation in 1990, while the media conglomerate lost $326 million the past two years, lost 605 jobs at Time, and is in debt $8.7 billion. Do you really think any of the above men are making brunch reservations at local soup kitchens?

The revolt against excess has plenty more territory to claim. Recent news tells us that the average, pretax income of the richest 1 percent of Americans went up 77 percent in the 1980s to $559,800. The salaries of the middle 60 percent of Americans ranged from a decline of 1 percent to an increase of only 9 percent. The bottom 20 percent suffered a 9 percent decline, to $8,400.

Among the richest Americans, in the Forbes 400, there is some evidence of giving. Virginia Binger, worth $300 million in 3M money, funds programs for the Minneapolis poor. Ewing Kauffman of Kansas City spends some of his $725 million in worth from pharmaceuticals on inner-city education programs.

Walter Annenberg ($860 million) has given $50 million to the United Negro College Fund. The Levi Strauss empire gives out environmental awards and criticizes President Bush. CEO Robert Haas ($280 million) says, "Even if the private sector helps create a thousand points of light across the land, it will be of no help if there's darkness in the White House."

But in general, self-absorption is the rule among most of the remaining 400. McDonald's Joan Kroc ($1 billion) has Ronald McDonald's Charities. But in 1989, she also purchased a Faberge Egg for $3 million. At a dollar a dozen, that could have been 36 million eggs for the hungry.

Barbara Johnson of the Johnson and Johnson empire ($940 million), purchased an 18th-century Italian badminton cabinet for $15 million, no doubt for her $30-million estate. Doris Duke of American Tobacco and Duke Power ($750 million) has a $30-million estate in Hawaii, and is so concerned about criminal justice that she put up the $5-million bail for Imelda Marcos.

As 1.9 million more Americans became unemployed since June 1990, and the numbers of those with no health insurance rose to 34.7 million -- the highest in a quarter century -- Idaho potato tycoon John Simplot flies a 55-foot American flag, boasting, "I love America. We've got the only system that works. It keeps everyone hustling."

You might think a few Fresh Air Fund kids could tap into mining man Dennis Washington ($500 million), who owns 55,000 acres of land in Montana, a yacht, and 64,000 acres in Oregon, which include an airstrip and bomb shelter.

The good times still roll at Salomon Brothers. The Wall Street brokerage firm is housing its No. 2 executive, Deryck Maughan, to the tune of $1,000-a-day for a temporary residence on the Upper East Side of Manhattan. The firm is also paying $7,900 a month to store and insure Maughan's personal property after coming from Tokyo. This "temporary" residence has been used since last July. Maughn's salary is $1.23 million.

As soup kitchen lines grow, John Kluge of Metromedia is awash in T-bones with his $5.9 billion of Ponderosa, Bonanza and Steak and Ale food chains. It is not enough that Paul Allen ($2.4 billion) owns the Portland Trailblazers basketball team. This non-NBAer built his own backyard court.

Robert Dedman ($700 million) is trying to find more rich people for his 250 country clubs. William Cafaro, the nation's seventh-largest shopping mall owner ($655 million), is trying to catch up to Edward DeBartolo ($1.4 billion), who owns 75 million square feet of shopping malls. Cafaro said,"Every time we open a mall, I get the same thrill."

Funny, no one on the Forbes 400 list says, "Every time we open some public housing, I get the same thrill." Then again, to have more public housing, some of the Forbes 400 would have to pay less for badminton cabinets, American flags, fake eggs and basketball courts, and pay more taxes.

For them, no excess means the thrill is gone.
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Warren E. Buffett, the multibillionaire investor who led Salomon Brothers Inc. out of its Treasury bond scandal, stepped down today as head of the brokerage firm's daily operations.

Buffett remains interim chairman and chief executive of the firm's parent company, Salomon Inc., but that is not a full-time job.

Deryck Maughan, who was named chief operating officer of Salomon after the scandal emerged last August, was appointed chairman and chief executive of Salomon Brothers.

The changes were expected. Buffett, who also is chairman of the Buffalo News, announced in March that he would step down after the government completed its investigations of the firm for submitting 10 false bids at nine Treasury auctions from 1989 to 1991.
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The biggest foreign broker in Japan is going native. Salomon Brothers told its staff a fortnight ago that its Tokyo branch manager, William Thompson, was to leave in January, after a year and a half in the job. A five-man committee will be set up to run the show, headed by two joint chief executives, Toshiharu Kojima and Shigeru Myojin.

Mr Kojima, once at Nomura Securities and now head of bond and equity sales at Solomon, inspires total fear and much loyalty--at least among Japanese employees. His co-boss and close friend, whom many call "Sugar", joined from Yamaichi and makes Salomon pots of money as its head of trading.

They are, in effect, taking up the reins from Mr Thompson, who assumed in 1991 the thankless task of following Deryck Maughan as Tokyo branch manager. Mr Maughan built up Salomon in Japan for five years, went to New York on the strength of that success and ended up as chief executive of the entire firm.

British-born Mr Maughan's greatest skill while in Tokyo was in managing the cultural divide between Japanese and Americans. He tended to favour the senior Japanese. This became clear in February, when he names Mr Myojin rather than Mr Thompson to the firm's 14-man executive committee in New York.

Mr Thompson clearly resented his relegation to the role of token white man. He will return to the San Francisco office, which he ran before coming to Japan. The new branch manager is to be Louis Faust, now chief administrative officer. Mr Faust has spent most of his time in Tokyo running settlements, and is probably the first back-office person in Tokyo to reach the heights of branch manager. Though Mr Faust may not have much real power in his new post, he probably will not mind. Branch managers enjoy quasi-ambassadorial trappings, such as chauffeur-driven cars and expense-account dinner parties.

Mr Maughan's decision to leave the running of the firm's Japanese business to Japanese is logical, but a bit risky. It assumes that Salomon can build a domestic business to compete with the likes of Nomura. But foreign brokers in Tokyo have done best either broking Japanese shares and warrants to foreign fund managers (at which Baring Securities once flourished)or adapting Wall Street technology to derivatives trading in Japan (where Morgan Stanley and Salomon itself have cleaned up). Meanwhile, Salomon is gaining a reputation as a refuge for Nomura alumni.
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April 12, 1994, The Independent, Banks act to avert derivatives crackdown, by Peter Rodgers,
THE top 15 banks and securities houses in the worldwide derivatives markets are putting the finishing touches to a new voluntary code which they hope will head off pressure for tougher government regulation, writes Peter Rodgers.

A meeting of senior bankers and securities specialists last weekend at the Ditchley Park conference centre near Oxford backed plans for stricter voluntary reporting of derivatives exposure.

They also recommended the work be taken a stage further, with new proposals to be developed for disclosure of the potential costs to derivatives firms of big market movements.

The Ditchley Park meeting, which included Deryck Maughan, chief executive of Salomon Brothers, William McDonough, president of the New York Federal Reserve, and David Band, chief executive of BZW, was the 10th anniversary meeting of the Institute of International Finance based in Washington.

Charles Dallara, IIF managing director, said yesterday that he expected an initial report by a working group on credit risk in the derivatives markets to be ready within two months.

He believed it would be adopted by the top 15 players in the markets - many of which were represented at the meeting - and would help to raise standards of reporting in the marketplace generally.

Under the proposals, there would be detailed quarterly reporting to central banks.

The next stage, reporting of market exposure, was a much more complicated issue to tackle, Mr Dallara warned.

SALOMON, the US investment banking and securities house, warned yesterday that it expects to report an after-tax loss of about $200m for the second quarter.

The announcement was viewed by analysts as an early indication of severe losses among a number of Wall Street investment banks as a result of the crash on the bond markets.

Salomon said its losses were attributable primarily to its client- driven businesses, which were "adversely affected by inventory- related losses, particularly in fixed-income markets, and declines in underwriting activity and customer trading volume".

Losses were also recorded in Salomon's proprietary trading businesses, though these are understood to be heavily outweighed by client business losses. The profits warning comes a fortnight ahead of the release of detailed quarterly figures due on 21 July.

Analysts said that Salomon Brothers, the securities and investment banking arm, was one of the world's biggest fixed-income market-makers, trading in stocks ranging from treasury bonds to mortgage-backed securities and corporate bonds.

Market-makers often reap large profits from their inventory in a rising market, but can be hit hard in a downward plunge.

"You cannot pull out just because markets are falling - if you want to keep your franchise you keep posting bid and offer prices," a rival trader said. "That means assuming risk in your client-driven operations."

In addition to marking down bond inventory values, commission income generated by the bid- offer spread also fell off sharply during the second quarter as worried investors retreated to the sidelines. The bond underwriting business also shrank after a boom year in 1993 when corporate borrowers rushed to issue fixed-rate bonds and take advantage of very low interest rates.

A particularly severe example of the drop in underwriting business is apparent in issues for Latin-American borrowers, where Salomon has been a market leader.

During the second quarter there were only 11 Latin-American offerings, raising a total of $1.3bn, compared with 49 offerings raising $5.7bn in the first quarter.

Losses at Salomon Brothers will be partly offset by good results at the Phibro division, the company's commodity trading business. Phibro is active in oil trading.

Salomon is headed by Deryck Maughan, a Welsh expatriate who replaced John Gutfreund when he resigned as a result of the 1991 treasury bond market scandal.

At closing Salomon shares were trading at $45.50 down $1.50 from their previous close, in heavy volume. They had been as low as $44.75 earlier in the day.
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Salomon Brothers Inc. named Dennis Keegan chairman of its risk-management committee after the firm blamed its practice of maintaining a huge inventory of bonds for its record second-quarter loss.

Keegan was put in charge of the 10-member committee last week, a spokeswoman said. Salomon Chairman and Chief Executive Deryck Maughan had been head of the committee. The firm, a unit of Salomon Inc., also named Keegan co-head of all fixed-income, the spokeswoman said.

(See: July 1, 1995, The Economist (US) Pay dirt: Salomon Brothers, "The latest to jump ship is Dennis Keegan, head of the firm's proprietary-trading operation (which bets the firm's own capital), who resigned on June 23rd [2005]")
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AT SALOMON Brothers in New York, Bill McIntosh, head of the fixed-income department, has a sign on his office door that reads SACOTU, which we are reliably informed stands for "Supreme Allied Commander of the Universe."

But the gung-ho plaque, an apparent reference to the bond trading yuppies in Tom Wolfe's The Bonfire of the Vanities, might have to be altered, as Mr McIntosh will now share responsibility for the firm's faltering bond division with Dennis Keegan, head of Salomon in London for 10 years.

The promotion makes Mr Keegan second only to the chief executive, Deryck Maughan. Certainly a master of the universe, if not its supreme allied commander.
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LIKE politicians, Wall Street bankers are famous for being somewhat economical with the truth. Or at least that is the conclusion to be drawn from the typical investment bank's annual report. Take the chairman's letter in the 1994 report of Bankers Trust, a big American bank. This referred to the bank's "outstanding performance" having been "somewhat clouded by difficulties we experienced in one area of our business, leveraged derivatives". A shareholder who had been on Mars for a few months would have little idea from reading this that the bank had been embroiled in several big and embarrassing lawsuits with its customers.

Other banks are also masters of the printed understatement. Top managers at Merrill Lynch, an investment bank facing a $2 billion lawsuit related to losses incurred by one of its clients, California's Orange County, used their 1994 letter to stress the firm's accomplishments at length, before briefly defending its conduct in the affair as "proper and professional". Details of the litigation were confined to the small print.

Three cheers, then, for Salomon Brothers. Its annual report for last year contains admissions of failure so blunt that they are almost disarming. "Your company's 1994 results were awful," wrote Robert Denham, the chairman of the bank's parent company, in the opening line of his letter.

Indeed they were: the Salomon group made a pre-tax loss of $831m. The letter continues by saying that: " . . . every non-comatose shareholder must be wondering whether management understands the business situation of Salomon Brothers . . . In other words, does management know what it is doing?" That question has been on the lips of most investment analysts; for the chairman to ask it, even rhetorically, is remarkable.

A lawyer by training, Mr Denham's role as Salomon's chairman is principally to act as a watchdog for Warren Buffett, a legendary investor whose Berkshire Hathaway group bought a 12% stake in Salomon in 1987, and now owns some 20% of the firm. Mr Buffett is renowned for his own frank and folksy letters to his shareholders. In this year's one he commented that a poor investment by his fund in USAir, an airline, had been, "a case of sloppy analysis". Mr Denham's burst of rhetoric has done his mentor proud.

Deryck Maughan, the chairman and chief executive of Salomon Brothers, the bank itself, is equally frank in his own letter. He refers to "stark" numbers, an "appalling" year and results that are "not acceptable". That is just the start. He goes on to admit that the bank "compounded a difficult market with some very poor trading. . . [and] paid a heavy price for the omissions of the past."

Admittedly, this mea culpa may be self-serving. Both Messrs Denham and Maughan go on to argue at length that the firm is fixing its problems, and they ask shareholders to judge it on its performance over the next few years. If this does not improve, no amount of self-flagellation will save Salomon's bosses' skin.
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Up and down Wall Street yesterday, traders and investment bankers were discreetly celebrating the demise of efforts by Salomon Brothers to challenge the way they are paid, by more closely tying salaries to overall company results.

All eyes have been on Salomon since October, when management announced a new pay plan designed to rein in some of the extravagance. If successful, it would almost certainly have been emulated by other securities firms equally anxious to cut costs by trimming salaries and the huge bonuses that often go with them.

But while the proposal was popular with the bank's shareholders and supported by the board, it infuriated Salomon's senior traders, some of whom will see their basic pay cut by almost two-thirds this year compared with 1994. The controversy triggered a damaging exodus from the company which in recent weeks has lost more than two dozen directors and traders.

In an apparent effort to staunch the losses, Robert Denham, chairman, sent a brief memo to staff at the end of last week, saying the board had decided "the compensation system employed for managing directors at Salomon for 1996 will be changed so as to be based on performance and market compensation levels".

Traditionally, securities firms have supplemented the basic pay of their workforces by paying often stellar bonuses from a central bonus pool. The level of bonuses was tied to the performance of individuals and often their departments. The doomed Salomon plan would have tied pay directly to the return on equity for the whole customer-service side of the bank.

The retreat is extremely embarrassing for Salomon, which in recent weeks has been bruised by avalanches of bad publicity over larges losses in fixed-income trading last year. The brunt of the criticism has been borne by Deryck Maughan, appointed chief executive in 1991 by Warren Buffett. Even his wife, Va Maughan, has not been spared the poisoned ink with references to an allegedly domineering personality.

At Salomon, officials offered no comment on the Denham memo. They indicated that a replacement pay system had not yet been fully devised. It remains possible the company will attempt some reform in its pay policy but of a kind that can be implemented more gently.
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Tokyo share prices fell again; the Nikkei slipped towards 14,000 nearly a third down on a year ago. The market was disappointed by the government's latest plan for sorting out banks' bad debts. Japan's life insurers, which are worried about how they can sustain their customary high payouts to investors, have also been big sellers. The eight leading insurers with assets of more than YEN 135 trillion ($1.6 trillion) reported an overall 31% fall in profits thanks to last year's plunging stock prices.

America and Japan kept up their trade row about cars and car parts in Geneva, under the auspices of the World Trade Organisation. To avoid upsetting the Group of Seven summit meeting in Halifax, Nova Scotia, which began on June 15th, further discussions were postponed for a week.

In the latest Latin American bank bailout, the Mexican government said it would rescue Banca Serfin, the country's third-largest bank.

Two of America's biggest payment and credit-card processing companies, First Data and First Financial Management, are merging to create a company with a market value of $13 billion and a leading place in the business.

Salomon Brothers said that it would revise a plan to cut the salaries of its top earners. Despite this embarrassing retreat, Deryck Maughan, Salomon's chief executive, retains the support of Warren Buffett, the investment bank's largest shareholder, who believes that pay should be based on results.

Guy Dejouany, chairman of Generale des Eaux, a French water utility, was placed under "judicial control" in the latest inquiry into allegations of corrupt corporate practices in France.

Shareholders at Suez, a French conglomerate, blocked plans by the group's chairman, Gerard Worms, to raise new equity. There is speculation that Mr Worms may go and the group may be broken up or merged with Societe Generale de Belgique.
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DERYCK MAUGHAN, the chief executive of Salomon Brothers, an American investment bank, may be in danger of becoming the John Major of Wall Street. Unlike the British prime minister, Mr Maughan does not face an open challenge to his leadership; but his authority is being sapped by internal bickering, and by defections of senior traders and managers. The latest to jump ship is Dennis Keegan, head of the firm's proprietary-trading operation (which bets the firm's own capital), who resigned on June 23rd. Unless Mr Maughan can rally his crew and push through some badly needed reforms at the investment bank, its shareholders may oust him.

Mr Keegan's departure is a serious blow to Salomon. It was he who filled the gap left by John Meriwether, a legendary trader who quit Salomon in 1991 after the firm was embroiled in a Treasury-bond- rigging scandal. And Mr Keegan won much praise for building up Salomon's London trading operation before leaving for New York in 1993.

So why did he leave so abruptly? One theory cites a row over his own salary. Another has him disagreeing with the decision, announced on the day of his resignation, to run the firm's proprietary and client operations as a single unit. Neither explanation seems plausible. Having earned $30m last year, even though Salomon lost money, Mr Keegan could hardly claim poverty. And when he was building up the firm's London operations, he made a point of trying to cure the bitter divisions that have long marred relations between the two sides of the firm.

A more likely explanation is that he was fed up with the apparent inability of Mr Maughan and Robert Den-ham, Salomon's chairman, to stick to a strategy. For instance, the decision to allow a single operating committee to oversee both proprietary and client operations reversed one taken two months earlier to run them separately.

To make matters worse, on June 10th Messrs Maughan and Denham abandoned a plan to link pay more closely with performance. The plan, introduced last year while the bank was losing buckets of money, caused dozens of defections. Mr Keegan's traders, who had long enjoyed the fattest bonuses, were said to be particularly unhappy. In April the firm tried to stop the rot by offering a $45m increase in this year's bonus pool. Continuing defections forced it to scrap the plan altogether.

Until recently, doubts about Mr Maughan's capabilities rarely surfaced outside Salomon. No longer. Recently a series of vindictive articles, fueled by vitriol provided by anonymous employees, has poked fun at his record. The rest of Wall Street has looked on with glee.

Mr Maughan's supporters say that, in spite of all this, he will succeed. They point out that Salomon will soon unveil healthy profits for the second quarter, after a dismal 1994 and a slow first quarter (see chart on previous page). Mr Keegan's departure has also removed the likeliest internal candidate to succeed Mr Maughan. In Mr Keegan's place he has appointed Shigeru Myojin, a close ally and a talented trader said to have made Salomon some $450m in 1991, or nearly half of its pre-tax profits.

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Mr Maughan's fate will probably depend on that of a second plan to overhaul Salomon's pay structure, whose details are being thrashed out. With its emphasis on shareholder value and accountability for poor performance, the first reform plan was a pioneering effort to rein in traders' greed and to stabilise the firm's volatile earnings. Its demise has reinforced the impression that Salomon is run for the benefit of staff who see shareholders as gullible suppliers of capital that they can plunder.

That will not please Warren Buffett, a legendary investor whose Berkshire Hathaway investment group has a 20% stake in Salomon, and who is widely credited with the push to link pay more tightly to performance. Although he has frankly acknowledged the failure of other investments, Mr Buffett has so far been tight-lipped about Salomon, except to make occasional supportive noises. His recent annual letter to Berkshire Hathaway investors admitted a mistake over his investment in USAir, an airline, but made no mention of the bank.

If Mr Maughan fails a second time, Mr Buffett could try to replace him with another manager. But that could simply lead to more damaging defections. Another option seems altogether more likely. In October Mr Buffett must choose whether to convert part of his stake into cash or Salomon shares. If Salomon shares (at present trading at around $40) are below $38, then it will pay Mr Buffett to take cash, even though the resulting signal to the market might harm the value of his remaining investment. It may be the only way he can back out gracefully from an expensive mistake.
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The embattled Deryck Maughan lost Dennis Keegan, his number two at Salomon Brothers, in the latest departure from the Wall Street firm.

Voters in Orange County rejected a tax increase to prevent the bankrupt Californian county defaulting on its debts. The county's previous treasurer ran up huge losses on the markets.
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THE chairman of Berkshire Hathaway, an American holding company legendary for its long-term investments, is renowned for the frank letters he sends to Berkshire's shareholders each year. Among other things, these usually contain several baseball analogies and some of Mr Buffett's own investment dictums. In last year's annual report, for instance, he wrote that: "If a business is attractive to buy once, it may well pay to repeat the process." On August 25th he put his investors' money where his mouth is, paying $2.3 billion for the remaining 49% of Geico, a big American insurer, that Berkshire does not own.

Now he faces a harder call. By late October he has to decide whether to convert one-fifth of Berkshire's 700,000 preferred shares in Salomon Inc, the parent firm of Salomon Brothers, an American investment bank, into cash or Salomon ordinary shares. Maybe it is Mr Buffett's turn to hear some frank advice.

Warren Buffett
Berkshire Hathaway
Omaha, Nebraska

Dear Warren,

Sorry to bring you back to reality when you are still savouring that Geico deal, but the deadline for a decision on your Salomon Inc stake is getting nearer. The market will be watching closely to see what you do. If you take cash, it will conclude that you are washing your hands of a troublesome investment and Salomon's ordinary shares will probably tumble. That will be bad news because Berkshire owns 6.6m of them. But if you convert into ordinary shares you will be increasing your exposure to a risky firm.

On reflection, you should take the cash. After all, as Berkshire's initial investment has not been wonderful, it will not pay to repeat the process. To paraphrase Mae West, too much of a bad thing can be terrible. If you do strike out, you will have a job convincing shareholders that your decision was the right one. I know you will explain it to them at length in your traditional mea culpa passage in next year's annual report. But you may want to write to them before then.

I suggest something along the following lines. You should stress that when you bought into Salomon in 1987 the bank was run by John Gutfreund, an old and trusted friend of yours. You had long admired his management style. You knew that the investment-banking business was cyclical and risky, but it seemed perfect for a long-term investment, especially one in the form of convertible preference shares.

What you failed to realise was that even a powerful manager like John could not stand up to the proprietary traders who gambled with the firm's own money, and who began to make a dominant share of Salomon Brothers' profits in the late 1980s. He caved in when they asked for outrageous bonuses, and that set the tone for later disruptive battles over pay. You should have seen that your efforts to tie bonuses more closely to the firm's overall performance were doomed.

Things really went awry after the firm was hit by the government- bond auction scandal in August 1991. In retrospect, John's departure was a crucial turning point. I know there was a strong consensus among other Salomon managers that Deryck Maughan was the man to take over, a perfect pinch hitter. And I know you took a shine to him when you met. But he lacks John's clout with the traders. You could also point out that, however unfairly, he has been closely linked with your efforts to change the bonus scheme. These have led to a rash of departures by senior staff, helping to undermine Deryck's authority inside and outside the firm.

Although your stake in Salomon has not been one of your best investment plays, you can still point out that Berkshire has not lost a lot of money. The preferred shares have paid a 9% dividend, so there has been some return on them (although the same cannot be said for your purchase of the ordinary shares). You might also point out that, like your disastrous investment in USAir, you failed to spot that more and more capital would seek diminishing returns in the investment-banking business. So even if Deryck had done a splendid job, Salomon itself was a riskier bet than it appeared.

One thought: why not revamp Salomon as a pure trading house, rather than as a bank with a client business? Or you could always move the proprietary-trading business out of the bank and into Salomon Inc, and then flog Salomon Brothers to a commercial bank if the Glass- Steagall act disappears. It would come out of left field, I know, but it's worth a thought. It might even boost the share price.

The future of Salomon Brothers, the venerable investment bank battered by losses, defections and low morale, is once again in question.

For the bank and its beleaguered chief executive, Deryck Maughan, Thursday should have been a day to pop open the champagne as its latest quarterly results showed an unexpectedly strong profit of $289m (pounds 184m). Instead, Warren Buffett, its principal shareholder, said he was selling $140m in preferred Salomon shares.

Mr Buffett, the feted investment guru from Omaha who came to the rescue of Salomon in 1991 after it was struck by a near-fatal bond-trading scandal, announced that he had better things to do with the money than plough it back into Salomon, even at a discount price.

To make the announcement on the day the profits became public hardly smacked of a vote of confidence and is seen as a further blow to Mr Maughan, whose future has been the subject of speculation for months.

The Buffett sale sparked gossip of a buyout for the bank, very likely by a foreign institution and quite possibly by one of the British clearing banks.

Mr Buffett insisted that his decision should be seen in isolation and did not imply that he had started a long-term strategy of pulling out of the bank. He will have four more opportunities to convert his preferred stock. "The decision not to exercise in no way predicts what I will decide when each of the four remaining options expires," he declared.

It is possible to take his statement at face value. At the slightly discounted price of $38, the common shares on offer to Mr Buffett might not have seemed very attractive. Salomon stock is not so low as to be a steal, but it languishes far behind other brokerage firms that have seen their market valuations leap in recent months.

If Salomon were to be bought, Mr Maughan's future there would probably become moot. Some analysts yesterday wondered aloud whether Mr Buffett had not exercised his option because he may be involved personally in buyout talks and could be worried about conflict of interest.

Among those with such thoughts was Michael Lipper of Lipper Analytical in New York. "There has been chatter . . . that somebody substantial would like to buy them. And definitely someone foreign."
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EVEN Warren Buffett, the Nebraskan billionaire who has won worldwide fame for his long-term investment acumen, is not infallible. In an occasional column, dubbed "Mistake du jour", that he pens for the annual reports of Berkshire Hathaway, an investment company that he controls, he has admirably owned up to a few bungles over the years, most notably a disastrous $358m investment in USAir, an American airline.

But for the ultimate Buffett blunder, nothing quite compares with his appalling nine-year investment of over $1 billion in Salomon Inc, which owns Salomon Brothers, an American investment bank. He has bought shares when Salomon's stock was expensive; he has declined them when they were cheap. His attempts to influence the firm's strategy have occasionally backfired spectacularly. Now Mr Buffett has announced new plans for his troublesome investment. Will he fare better this time?

The rest of Wall Street will be watching closely, not least because Salomon Brothers is often cited as one of the few big Wall Street securities houses that may be snapped up when America eventually abandons rules that prevent commercial banks from owning large investment banks. Many will also be curious to see whether Mr Buffett and Deryck Maughan, Salomon Brothers' chief executive, can make any further progress in their crusade to turn one of America's most aggressive trading powerhouses into a far more shareholder-friendly beast.

Berkshire Hathaway owns two types of Salomon shares. It has 6.6m of the firm's ordinary stock (about 6.3% of the total, making Berkshire Salomon's biggest shareholder). And it still owns 560,000 of the 700,000 preferred shares it bought for $1,000 apiece in 1987. These pay a fixed 9% dividend each year. They can be converted into Salomon's common shares, at $38 per share, or redeemed for cash when they expire. The preference stock must be converted or redeemed in five tranches, the first in 1995 and the last in 1999.

Last year Berkshire decided to convert 140,000 preferred shares into cash, a decision that was interpreted as a warning from Mr Buffett to Salomon's managers to get their house in order. On September 12th, however, Berkshire announced that it intended to convert a second tranche of 140,000 into common shares when they expire next month. If it does so, it will increase its stake in Salomon to 10.3m common shares, or 9.8% of its equity.

This may come as some surprise to seasoned Buffett-watchers, for Salomon has been a worrisome investment for Berkshire Hathaway. Mr Buffett bought his common shares at the end of 1993 and the beginning of 1994. Salomon had made record net profits of $827m in 1993 and its share price that December was close to $50. But in 1994 Salomon lost a net $399m as bond markets collapsed. By the end of that year, its shares had fallen by 25%, to $37 1/2 (wiping $76m from the value of Berkshire's investment).

Last October, when Mr Buffett declined to convert his first tranche of preference stock into common shares, Salomon's share price was $40. He had decided, he said, that "there is something else I would rather have Berkshire do with the money." Ironically, Salomon has since been on a roll. It made a net $168m in the fourth quarter of 1995, and $567m in the first half of this year, the most profitable six months in the firm's history. Since last October its shares have climbed by 15%, to $46.

But Mr Buffett's financial misjudgments have not been the only embarrassments he has suffered as a result of his investment. John Gutfreund, Salomon Brothers' former chairman, was a trusted friend of Mr Buffett's. "John Gutfreund runs an extremely good operation at Salomon," Mr Buffett told his shareholders at Berkshire Hathaway's annual jamboree in April 1991. But four months later Mr Gutfreund resigned amid allegations that Salomon had been rigging America's Treasury-bond auctions. (The firm later admitted breaking the rules and settled civil charges against it.)

This episode convinced Mr Buffett that the firm's culture needed to change. But at least one of the reforms that he inspired had disastrous consequences. In 1994, Mr Maughan overhauled the way that Salomon paid its star traders, tying their salaries much more closely to the group's overall performance.

Over the following months, about a tenth of Salomon's managing directors resigned as their salaries plunged. One who left was Dennis Keegan, head of the bank's bond-arbitrage group (which bets the firm's own capital). His outfit made $1.4 billion in pre-tax profits for the bank in 1992 and $416m in 1993. Faced with this exodus, Mr Maughan abandoned Mr Buffett's compensation scheme last year.

Why so many bungles? Mr Buffett is certainly not the first investor to come unstuck on Wall Street. Investment banks may sometimes earn fabulous riches. When they ration out that wealth, however, shareholders are often to be found at the back of the queue. Salomon is no exception. In 1994 the firm paid its staff $1.4 billion, despite its huge losses that year; Mr Keegan was paid an astonishing $30m. Yet if managers try to pay traders any less than they think they deserve, they are quickly lured away by offers from rival firms.

Heading for the exit

So what will Mr Buffett do now? The fact that he plans to increase Berkshire's stake in Salomon looks like a vote of confidence in the firm. But it may not be. Mr Buffett may have had enough. Although he will increase his ownership of Salomon if he converts his preference shares, he made a second, more important, announcement on September 12th. Berkshire may issue $400m of bonds that can be exchanged, at some future date, for a substantial amount of the Salomon shares that it owns. (If, for example, investors owning the bonds can swap at $50 per share, then Berkshire will rid itself of 8m shares in the event that all of the bonds are swapped for equity, and not redeemed for cash.)

So Mr Buffett finally appears to have done something shrewd with his investment. By announcing that he will convert his preference shares into common stock, he has sent a positive signal to the market while discreetly arranging a sale by the back door. At the same time, he may be able to reduce Berkshire Hathaway's borrowing costs: the higher investors think Salomon's share price will climb in the future, the lower the interest rate Berkshire will have to pay on the exchangeable bonds.

This wheeze also suits Salomon. It appears less damning than a straightforward sale of the firm's stock. Those who think that this is yet more proof of Mr Buffett's investment savvy have little reason to cheer, however. For he did not cook up this scheme. Salomon did.
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In London the pace has been set by the American-owned investment banks JP Morgan, Salomon Brothers, Morgan Stanley and Goldman Sachs. City brokers and bond dealers are now topping the pay levels of their Wall St opposite numbers. However, they will all fall short of the $10m bonus awarded this Christmas to the Englishman who heads the Saloman Brothers investment bank in New York. Deryck Maughan, a Durham miner's son who worked for the Treasury for 10 years before leaving to join the American bank, collects his bonus in addition to his $1m salary.
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NEW YORK - Salomon Brothers Inc. said it formed an alliance with Fidelity Investments, allowing customers of Fidelity's discount brokerage unit to buy as much as 10 percent of the shares in public offerings Salomon arranges.

The agreement also permits the discount brokerage unit to distribute Salomon's stock research to its clients.

Fidelity Brokerage Services Inc. "is pure retail, lots of distribution, but they have no origination and no research," said Deryck Maughan, chairman of Salomon Brothers, the third-largest U.S. securities firm in terms of capital. "We have lots of origination and research, but no retail. We figured, why don't we join with them."

The agreement comes as Salomon expands its equity underwriting business, growing to the sixth-biggest equity underwriter in 1996 from the 10th spot in 1995, according to Securities Data Co.

Salomon has been aggressively strengthening its equity-underwriting franchise, which has lagged that of its bond operations. In 1996, the firm more than doubled the volume of stock underwritings from the previous year, raising its market share to 5 percent from 2.7 percent.

The move blurs the line between full-service brokerages, like Merrill Lynch & Co., and discount brokerages like Fidelity, which charge less because they offer no research or advice and don't underwrite securities.

With the alliance, which is mutually exclusive for three years, Salomon gets distribution by linking up with Fidelity's 1.5 million discount-brokerage customers as well as Fidelity's 6 million mutual-fund customers. The mutual-fund customers must open a brokerage account to be able to buy the stocks Salomon underwrites.

Fidelity gets what no other discount brokerage has: access for its individual investors to initial public offerings that are in high demand.

"It's a great opportunity for us to offer our clients access to a market they haven't had access to before," said Bob Mazzerella, president of Fidelity Brokerage Services.
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WALL STREET'S investment bankers like to moan that Fidelity, America's biggest mutual-fund company, can make or break an offering of shares, such is its clout. The Boston-based firm, which has been troubled in the past year by successive shake-ups among its fund managers, is viewed with a mixture of awe and suspicion for its willingness to snap up large positions or shun a new issue entirely. So there were plenty of raised eyebrows on January 17th when Salomon Brothers, one of Wall Street's biggest investment banks, announced that it had formed a strategic alliance with Fidelity. Surely this was getting a little too close for comfort?

The deal was immediately overshadowed by news of yet more management turmoil at Fidelity. Indeed, on January 21st the firm began a humiliating roadshow intended to reassure customers that it can handle the pressures of its success (it has $500 billion under management). But the tie-up with Salomon deserves more attention, for it raises the possibility of other such deals as leading Wall Street firms jockey for position.

Under the venture, Salomon will give Fidelity's retail brokerage business (as opposed to its mutual funds, which will continue to treat new issues as before) direct access to at least 10% of each equity underwriting, including flotations. If that sounds unremarkable, consider that most retail investors never have the chance to buy new offerings. Fidelity runs its own discount brokerage business, but also sells its products through a network of some 28,000 brokers and has a fast-growing business serving rich people. In a further innovation, customers will have access to Salomon's equity research on American companies and foreign firms issuing shares in America.

The real trick by Fidelity is its intention to market new issues to its millions of mutual-fund customers as well as existing brokerage customers. Thus, for instance, an investor in Fidelity's Multimedia fund might be sent a letter offering him shares in the forthcoming flotation of an on-line venture. The catch? He must also open a brokerage account with Fidelity. The potential boost to Fidelity's business at the expense of existing full-service brokers is obvious.

On the face of it, Salomon is an odd choice for Fidelity. Its reputation is far stronger in bonds than equities, although Deryck Maughan, Salomon's chief executive, has been strengthening the equity business. Last year Salomon earned record fees and ranked sixth in league tables of domestic share underwritings, its best showing for five years. But its 5% market share was still way behind the 12% and 14% achieved by Merrill Lynch and Goldman Sachs respectively. It will have to maintain progress if the three-year venture with Fidelity is to be renewed.

In fact, Salomon chose itself. Mr Maughan says the two firms talked about a venture after Fidelity's startling success in distributing shares in a special secondary offering last year by Berkshire Hathaway, a vehicle controlled by Warren Buffett, a well-known investor who is also a Salomon board member. Until its venture with Fidelity, Salomon lacked a way to distribute securities to retail investors. Rather than buying a distribution network by acquiring a broker, Salomon has found an elegant and cheap way to tap into an existing network. It can now plausibly claim to potential issuers that it can test retail as well as institutional demand.

Indeed, the deal could find imitators. Goldman Sachs lacks the retail network of, say, Merrill Lynch, or a mutual-fund arm like that of Morgan Stanley. Perhaps it could join forces with, say, Charles Schwab, America's leading discount broker. Then the country's huge retail market would truly be up for grabs.
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Sep. 24--Salomon Inc., the brokerage giant that Omahan Warren Buffett rescued from scandal in the early 1990s, will be purchased by Travelers Group in a $9 billion deal announced Wednesday.

Berkshire Hathaway Inc., the Omaha-based company led by Buffett, owns about 18 percent of Salomon.

Buffett said Wednesday that Sanford Weill, Travelers' chairman, "has demonstrated genius in creating huge value for his shareholders by skillfully blending and managing acquisitions in the financial services industry. In my view, Salomon will be no exception."

After the deal was announced, Salomon stock rose $6.88 a share to $78.38 in the first 45 minutes of trading Wednesday. Travelers fell 50 cents a share to $71.44. Berkshire stock was up $100 a share at midday at $45,200.

The transaction will bring together two of Wall Street's most powerful investment firms and is the latest in a wave of buyouts in the financial services industry. Brokers, banks, insurers and other asset managers are combining to compete more effectively.

Travelers said it will merge Salomon with its Smith Barney brokerage division to create Salomon Smith Barney.

Under the deal, Travelers will issue 1.13 shares of its stock for each share of Salomon stock for a total value of over $9 billion.

James Dimon, chairman and CEO of Smith Barney, and Deryck Maughan, chairman and CEO of the Salomon Brothers investment arm, will serve as co-chief executives of Salomon Smith Barney.

Buffett installed Maughan as the head of Salomon Brothers after a Treasury bond-bidding scandal forced the company's three top officers to resign in August 1991.

Buffett stepped in as chief executive of Salomon as the scandal threatened to destroy public confidence in the company. Salomon Brothers had admitted violating rules for bidding in U.S. Treasury auctions, and said the three top officers knew about the violations but waited months to tell the government.

Buffett pledged to clean up the firm. He ousted other Salomon officials who were implicated in the scandal, apologized to Congress for the firm's wrongdoing and formed a committee to ensure compliance with regulations.

He instituted a compensation structure that more closely tied pay with the profits of the company.

"He managed to save the name and reputation of the company and put it back to where it is obviously a very desirable property," said George Morgan, a stockbroker at Kirkpatrick Pettis in Omaha. "He did it with good old Midwestern integrity."

Buffett resigned as head of Salomon Brothers in May 1992 after the firm reached a $290 million settlement with the government over the Treasury bidding scandal. The firm avoided criminal charges.

Weill, Travelers' chairman and chief executive, said the buyout of Salomon will substantially strengthen Travelers' Group's earnings and capital base. The buyout was approved by the boards of directors of both companies and is expected to be completed by the end of this year. It is subject to federal regulatory approval.

Salomon Brothers provides international financial services for corporations, governments, central banks and other institutions. Salomon Inc. also includes units that trade energy-related commodities and refine oil.

Travelers expects a restructuring charge to lower its profits by $400 million to $500 million when the transaction is complete.

The latest in a series of giant mergers was unveiled on Wall Street yesterday as Salomon Incorporated, the parent of investment bank Salomon Brothers, said it had agreed to an all-share buyout by the financial services giant, Travelers Group.

The after-shocks for Wall Street are expected to be monumental, establishing Travelers, and its retail stockbroker Smith Barney, as a new Goliath on the securities landscape. It elevates the enlarged firm to the mega-institution status of rivals such as Merrill Lynch and the recently merged Morgan Stanley Dean Witter.

The new company will be called Salomon Smith Barney Holdings. Its creation is certain to trigger extensive lay-offs at both companies to eliminate overlapping, especially among fixed-income traders and analysts. News of the merger came as a complete surprise in London where only a handful of senior Salomons employees were aware of the takeover. The agreement also sees the departure of Robert Denham, chairman and chief executive of Salomon, and confirms the rise and rise of Deryck Maughan, the 49-year old British chief executive of Salomon Brothers, who will serve as co-chief executive of the new firm alongside James Dimon, 41, chief executive of Smith Barney.

Mr Maughan's promotion is the culmination of a meteoric rise for the son of a Durham miner, who spent 10 years in the Treasury before moving into investment banking. He was promoted by Salomon's biggest shareholder, investment guru Warren Buffett, after the firm was found to have rigged US treasury bond auctions in 1991, the low point of a turbulent 10 years for the bank. Mr Maughan took over as chairman and chief executive following the departure of three of Salomon's most high-profile directors, legendary chairman John Gutfreund, Salomon's president Thomas Strauss and trader John Meriwether. Mr Maughan was seen then as the epitome of the new squeaky clean image Mr Buffet wanted to foster following a famous description of the bank as "rotten to the core".

He was dubbed "Mr Integrity" by the Salomon staff who dominated the American bond market in the late 1980s and served as role models for the "Masters of the Universe" in Tom Wolfe's novel, Bonfire of the Vanities. Mr Maughan worked in the British Treasury between 1969 and 1979 before being seconded to investment bank Goldman Sachs in London, where he stayed for four years before being lured over to Salomon in 1983.

In 1986, he went to Japan for five years building up the group's highly profitable Tokyo operation and had just returned to New York when the treasury scandal blew up.Peter Middleton, the former monk who unexpectedly quit Lloyd's of London to head up the bank's European operation, has been named head of the combined business in Europe.

Salomon employs 1,500 in Europe, compared with Smith Barney's 250. Travelers, with its red umbrella logo, has long been publicly parading its desire to find new partners and extend its operations. Headed by the highly regarded Sanford Weill, Travelers offers financial services ranging from life, property and casualty insurance to annuities and mutual funds. "The complementary strengths of these two organisations . . . will create a financially powerful and formidable competitor in virtually ever facet of the securities business, in any region of the world," Mr Weill said in a statement.

Travelers is offering 1.13 shares of stock for every Salomon share. Until only a few days ago, rumours had it that Mr Weill had his sights on Bankers Trust. It was suggested that Salomon was a second or third choice for Mr Weill. Goldman Sachs may have been his most favoured option but is understood to have resisted Travelers' advances.

Initial reaction to the Salomon deal was overwhelmingly enthusiastic. "We think this combination will create nothing short of a powerhouse," said Erik Gustafson of the Stein Roe Stock Fund, which has holdings in both companies. Even on Tuesday, shares of Salomon soared to a historic high of $71.50 as first rumours of the buyout began to leak and speculators saw their chance for a killing. By mid-morning yesterday, they were trading at $78 a share.

Attention is now likely to focus once more on the two securities houses that still remain independent on Wall Street but which have long been seen as inevitable targets for acquisition: Paine Webber and Lehman Brothers.

"The merger and acquisition mania is just going to continue," Robert Froelich of Kemper Funds suggested. "I don't think there's any company in financial services which is too big to be taken over.."

There are serial attractions to yesterday's link-up. A good match is promised between Smith Barney's strong equity and retail operations with the famous fixed-income franchise of Salomon Brothers. In addition to its bond business, Salomon is also a force in commodities and global markets trading. The deal also answers Mr Weill's desire to give Smith Barney an international presence that had been lacking.

Salomon has a big network of offices world-wide, notably in London. Questions will be asked, however, about Salomon's heavy dependence on the proprietary division, where traders make huge leveraged bets in the international bond markets with the firm's own capital. This is a notoriously volatile business that Mr Weill may very well like to see phased out.
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Another day, another mega-corporate merger, this time between two of Wall Street's "bulge bracket" investment banks. Were there special factors driving Smith Barney and Salomon Brothers together or is this our old friend globalisation at work again?

Mercifully, the statement announcing the marriage mentions the dreaded word only once (a remarkable achievement when set against the extraordinary outpouring of global gobbledegook visited upon us by Coopers & Lybrand and Price Waterhouse last week) but there is no mistaking the general tone of what Sandy Weill, the charismatic chairman of Travelers Group, is saying here.

Yes, it is all about the perceived need to get bigger and bigger to meet the challenges of a progressively integrating world economy. This is a very similar merger to that announced earlier this year between Morgan Stanley and Dean Witter, and there is undoubtedly an element of me-too-ism in what Travelers is doing here. Again a wholesale investment bank with a substantial presence in international capital markets is being brought together with one of the US's largest retail stock brokers. Smith Barney has an outlet in every town of substance the length and breadth of the land. As with the Morgan Stanley deal, it is not immediately apparent why a merger of two such different strands of the investment banking world should either work or yield much in the way of benefit to anyone. While it is true that there is some potential for cost- cutting, again the lack of fundamental overlap between the two businesses may make this quite limited. There will be extensive layoffs among bond traders and analysts, but that is where the process largely stops. Size in itself will also yield some benefit in the way of cheaper capital. Furthermore, Salomon gets a ready made and captive distribution network for its capital- raising escapades.

There is also something to be said for the argument that size for the sake of it gives competitive edge by allowing executives to take risks that would be unthinkable for smaller organisations. Big companies can gobble up business opportunities in a way that smaller ones cannot. If for no other reason than this, others in the industry, including our own dwindling band of independent integrated investment banks here in Britain, will feel themselves duty bound to respond. But where does it all end? There's one person that always fails to get a mention in all this global corporate empire building - the poor old customer. As often as not, these mergers are more about crunching and exploiting the customer than serving him.

Deryck Maughan, chief executive of Salomon, is a sensible chap on the whole, as you would expect from a former Treasury man. He's also achieved astonishing success in restoring the Salomon name after the "rotten to the core", Bonfire of the Vanities frolics of the 1980s. But is not this race for the "truly global corporation" its own form of vanity? Whether it will all end in a bonfire is anyone's guess but there is at least a reasonable possibility of it.
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Another earthquake shook Wall Street Wednesday as the Travelers Group, the owner of the Smith Barney brokerage, announced it will acquire Salomon Inc., parent of Salomon Brothers, for $9.3 billion, creating the nation's third-biggest securities firm.

Less than eight months after Morgan Stanley agreed to merge with Dean Witter Discover, and after a flurry of smaller deals, Wall Street again finds its ranks thinned by a historic consolidation wave that seems to surge higher by the day.

Market observers expect roughly 2,000 employees to lose their jobs in the latest deal, with Smith Barney's fixed income unit and Salomon's equity group seen to be among the first victims of the deal. While the two companies are not commenting about possible layoffs -- employees were said not to have been told about layoffs in meetings Wednesday -- Travelers said it would take up to a $500 million merger-related charge after the deal closes because of costs such as severance packages. And whether Travelers will keep Salomon's highly volatile proprietary trading unit is a big question mark.

These issues could make the integration of the two firms tough. Unlike Morgan Stanley and Dean Witter, which had few overlapping units, Smith Barney and Travelers have common groups such as bonds and stocks. Indeed, Travelers has struggled mightily to build its investment bank, Smith Barney, so how that company will fare is unclear. The fact the new investment bank will be called Salomon Smith Barney -- despite Salomon being the company acquired -- is a signal there could be a lot of bloodletting at Smith Barney.

"Inevitably there will be a lot of layoffs, to make it work and get the savings," said Gerard Smith, a managing director at UBS Securities and a former Salomon director. "At a minimum there will be a billion dollars of savings, which is a third of Salomon Brothers' cost structure."

At least 2,000 to 3,000 layoffs could occur due to the merger, added Tony Russ, an analyst with Shelby Cullom Davis & Co. "The strength of Salomon is its fixed income, so Salomon should clearly win the fixed income side of this business," he said. "And Smith Barney should win much of the equity side of the argument. After you get past that, there will be a lot of turf battles. I am very surprised, I still don't see the overall fit."

Not everyone agreed with the criticism that the two firms were a bad mix. James Schmidt, portfolio manager at John Hancock and a large Salomon shareholder, told CNBC Wednesday that he liked the fit between the two. Travelers gets several areas it was weak in, like fixed income and international trading, he said. "They cover the landscape much better together than they do separately," he added.

The critical question for many observers is whether Travelers will sanction the huge trading swings common at Salomon Brothers, which derives roughly 70 percent of its income from trading. "Smith Barney's control-orientated management style will likely conflict with Salomon's considerably looser style, which accepts occasionally large trading losses as part of the cost of doing business," said Standard & Poor's, which affirmed Smith Barney's ratings Wednesday.

"The tension resulting from these two distinct styles may be aggravated by the management structure of the new organization," S&P said. Salomon Smith Barney will have two co-chief executives, Smith Barney's James Dimon and Salomon's Deryck Maughan.

Smith Barney has had its share of trouble trying to meld disparate cultures. Several years ago, in a bid to become a high-profile investment bank, Smith Barney hired Morgan Stanley's merger guru Robert Greenhill and his team of high-priced investment bankers. Cultural clashes at Smith Barney, known more as a sleepy brokerage house, emerged instantly. After two years of conflict and few results Greenhill left the firm.

Now Smith Barney will get together with Salomon, known for its gunslinging, take-no-prisoners style immortalized in the book, "Liar's Poker." But many Wall Street pros are hesitant to bet against Travelers' chief executive Sanford Weill, who has made his reputation with dozens of acquisitions to build Travelers into an international financial services powerhouse.

"Smith Barney is now approaching the Merrill Lynch paradigm" of being everywhere all the time, said UBS' Smith. "With a $55 billion market capitalization, which is twice as large as Morgan Stanley or Merrill Lynch, (Smith Barney) has fantastic muscle and broad reach." Under the deal, Travelers will issue 1.13 shares of its stock for each share of Salomon stock for a total value of $9.3 billion. The deal is worth $78.46 per share for Salomon stockholders, well above Tuesday's $71.50 closing price.
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At a time when most of his one-time peers on Wall Street have burned out - or been booted out - Weill, who is 64, has just scored a coup for Travelers Group, the company he built from other people's castoffs. He has bought Salomon Brothers, a firm known as the biggest, baddest bond trader on the Street, and maybe on the planet.

And Weill, who a decade ago was written off as a has-been, is clearly filled with glee. "He's having the time of his life,'' said James Dimon, his second-in-command for 15 years and the chief executive of Smith Barney, the Travelers brokerage firm.

Weill is grinning even as he takes on a challenge that has brought other Wall Street powerhouses to grief - building a financial services firm that can do everything, everywhere, from advising China on billion-dollar deals to selling mutual funds to amateur investors in Cincinnati.

And he is doing it by trying to swallow a firm with a troubled past and a high-testosterone culture that has resisted even Warren Buffett's efforts to tame it.

The Salomon deal is the culmination of a lifelong dream, he said, to build what he calls "a great financial services company without parallel."

And if that means coping with the outsized egos - and salaries - that characterize Salomon, well, "I have experience with diverse cultures, and getting people to work together," he said.

In the course of an hour's conversation, Weill boasts of his years of experience and of how he has "been out of just Wall Street" since 1981.

At the age of 27, after just five years as a stockbroker, Weill opened his own firm with some friends, who used every penny they had to buy a seat on the stock exchange, said Roger Berlind, now a Broadway producer. "We started out working around the clock," Berlind said, "and Sandy's still doing that, from everything I hear."

Weill began buying other brokerage firms, assembling the huge network of stockbrokers that became Shearson Loeb Rhodes. He was famous for negotiating hard bargains and for inspiring the troops while slashing costs.

But in 1981, he made a deal that would lead to disaster for him. He sold Shearson to American Express Co., the credit card giant. But he and James D. Robinson III, the chairman of American Express, could not work out their differences; in 1985, Weill became unemployed.

Despite a reputation for ruthlessness, Weill is well known for his loyalty and surrounds himself with old associates.

Admirers point out that he remains married to the woman he married right out of college, Joan Mosher Weill, and that his son Marc works for Travelers. Deryck Maughan, the chairman of Salomon Brothers, is a friend of almost 10 years.

Indeed, in the midst of all the long phone calls and secret meetings in hotel rooms that characterize a big merger, Weill found time to place a condolence notice in the newspaper on Wednesday for William Overman, a money manager, "one of our first and most loyal investors."
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Extending a wave of consolidations on Wall Street, Travelers Group Inc. said Wednesday it would acquire the bond-trading powerhouse Salomon Brothers Inc. for about $9.5 billion in stock.

Salomon, whose strengths are in institutional finance and trading strategies that risk its own cash, would be merged with Travelers' more staid Smith Barney Holdings Inc. brokerage house to form Salomon Smith Barney Holdings Inc.

The companies said the combined concern would be the third-largest underwriter of stock issues and the second-largest underwriter of U.S. bonds, based on 1996 data. But the deal is more notable for the way it links each company's strong points than for the absolute size of the resulting operations.

There has been a wave of consolidation in the American financial-services industry this year. One recent amalgamation was the takeover of Morgan Stanley Inc., which like Salomon had a strong international institutional business, by Dean Witter, Discover & Co., which like Smith Barney, had significant retail operations.

That deal followed shortly after Salomon itself forged an alliance with the mutual-fund sponsor and discount brokerage Fidelity Investments as a way to get the stocks and bonds it underwrites directly to individual investors.

Travelers has been built up from the financial-services divisions of what had been American Can by its chairman, Sanford Weill. Many of Salomon's operations are complementary to those of Smith Barney, especially its international institutional finance and bond-trading capabilities, according to Perrin Long, an independent securities-industry analyst in Darien, Connecticut. He said the deal was "a good fit for Travelers and particularly for Salomon Brothers."

Most of the major credit-rating agencies agreed, saying that they might upgrade Salomon's credit to reflect the acquisition. Salomon's bonds are considered investment grade, but in the lowest categories, while Travelers' obligations are more highly regarded, carrying double-A ratings. Because Travelers is paying for Salomon with its own stock, it will not have to borrow money for the takeover.

Mr. Weill's style is more conservative than the hard-driving Salomon corporate culture, Mr. Long said, although Salomon's proprietary bond-trading operations were obviously one of the reasons the firm was attractive.

Mr. Weill was prominent on Wall Street in the early 1980s, when he sold Shearson Loeb Rhoades to American Express Co.

Mr. Weill was president of American Express for a time, but then left and began a string of acquisitions of financial companies.

In contrast to Mr. Weill's cautious management of his companies, Salomon is known for an aggressive style that has caused problems at times, although it has also led to substantial profits. The firm was hit hard by losses in its mortgage-securities division following the 1987 stock-market collapse, and it obtained $700 million of capital from Berkshire Hathaway Inc., the conglomerate controlled by Warren Buffett. Salomon's troubles were compounded in February 1991, when it improperly bought most of an issue of Treasury bonds at auction, then executed a similar maneuver in May of that year.

After the transactions came to light and the government began legal actions, Mr. Buffett took control of Salomon, eventually installing Robert Denham as chairman of the parent Salomon Inc. and Deryck Maughan as chairman of the Salomon Brothers securities unit. Mr. Denham said Wednesday he would leave Salomon after the takeover, but Mr. Maughan will be co-chief executive of Salomon Smith Barney and vice chairman of Travelers. Mr. Maughan is to be joined by James Dimon, the current Smith Barney chairman, as co-CEO of the merged concern.

At the end of last year, Berkshire Hathaway owned 10.31 million, or about 9.4 percent of Salomon's shares, and additionally held 420,000 preferred shares convertible into about 11 million shares of common stock.

One reason that Salomon was attractive to Travelers was that it was relatively inexpensive. This month, before rumors surfaced that Travelers was on the prowl for an acquisition, Salomon's stock price was seven times its annual earnings per share, a relatively low valuation.

Under the takeover announced Wednesday, Salomon shareholders are to receive 1.13 shares of Travelers stock for each of their shares. With Travelers' shares closing at $69.4375 Wednesday, down $2.5625, the offer is worth $78.46 for each of Salomon's common shares. According to the company's most recent annual report, there were 120.9 million shares either outstanding or available through conversions of other securities, so the deal would be worth about $9.49 billion. Salomon's common stock closed at $76.75, up $5.25

Travelers said it expected to close the deal before the end of the year and that it would take a restructuring charge of $400 million to $500 million, which would include severance charges. Mr. Long said there would inevitably be layoffs, but he said Mr. Weill had a history of keeping the better of two units or employees where there was an overlap, even if that meant laying off workers at the acquiring company.
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Once cast as the invulnerable buccaneers of Wall Street with their multi-million-dollar pay packets and swaggering ways, the ranks of traders and analysts at Salomon Brothers are now all nerves. For hundreds, the blockbuster buy-out of the firm last week by Travelers Group may mean redundancy.

Most analysts see as many as 1,500 jobs being lost as Salomons is folded into Smith Barney, the brokerage unit of Travelers. That, combined with other awkward realities now starting to emerge, is beginning to cloud the sun-burst of praise that met the deal at its unveiling on Wednesday.

Not that the joyous moods of at least two men will be dented. By fusing Salomon with Smith Barney, Sandy Weill, the Travelers chairman, will control a firm, Salomon Smith Barney Holdings, that is able to compete head-on with giants Merrill Lynch and the newly merged Morgan Stanley Dean Witter. From every angle, Mr Weill's new creation will be a powerhouse, combining the retail-equities strength of Smith Barney with the global franchise of Salomon in fixed-income trading.

It will, for example, have $55bn (pounds 34bn) in market capitalisation, more than twice that of Merrill Lynch. Meanwhile, it is pay day for Warren Buffett, the legendary market guru from Nebraska, who last week saw his original $700m investment made in Salomon in 1987 parlayed into a holding with a paper value of $1.5bn. Mr Buffett will receive the agreed 1.13 Travelers's shares for each of his Salomon shares, giving him a 3 per cent stake in Travelers.

While there has been no word yet on the details of the lay-offs, Travelers confirmed it would take a $500m charge from the acquisition, much of which will go towards redundancy payments. And most observers expect most of the pain to be suffered among traders and analysts at Salomons. Such a bloodbath is already attracting attention from New York's state government.

Suggesting that Mr Weill may be about to become a "corporate welfare cheat", Senator Franz Leichter is calling on New York Mayor Rudy Giuliani to review a 1994 deal under which Travelers was granted $22.1m in tax breaks on condition it created at least 2,100 new jobs for the city. A massive redundancy campaign could be in breach of that deal.

Another needling problem concerns Salomon's long-term lease at its World Trade Centre headquarters. If, as Travelers has already signalled, Salomons staff are moved to the new Travelers headquarters several blocks north in Manhattan's Tribeca district, Salomon may incur huge costs, perhaps as much as $56m a year, in sub-letting its current space. Its lease on its existing offices, which is unbreakable, runs for another 16 years to 2013.

More fundamental, though, are the doubts bubbling through about the workability of the relationships at the top of the management pyramid, whereby Mr Weill has appointed Deryck Maughan, the chief executive at Salomon who is British, and James Dimon, his counterpart at Smith Barney, as co-chief executives of the new entity. Some say the men and their egos are bound to collide. Even if the two, who claim their areas of expertise are complementary, work well together, the arrangement sets up an inevitable horse race as to the eventual succession when Mr Weill steps down.

"It's an inherently unstable relationship," Noel Tichy, a professor at the University of Michigan, told BusinessWeek. "My guess is that this is a transition vehicle to get past the merger phase."

But Mr Weill told the Wall Street Journal he saw no prospect of instability in the power-sharing set-up. "Jamie and Deryck have the intellect and personalities to get along fine and be a perfect team." Among those laying bets on the horse race, Mr Maughan appears to be the favourite to survive in the long term. This may be because he is a reasonably close friend of Mr Weill's. Meanwhile, Mr Dimon had an unfortunate spell in the summer when one of his top officers at Smith Barney walked out. She was Jessica Bibliowicz and she happens to be Mr Weill's daughter.
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SANFORD (JUST CALL ME SANDY) Weill doesn't go for the bland McCorporate look. His office is full of stuff. There's a photo of the two-family house in Brooklyn, N.Y., in which he grew up, another of him palling around with Bill Clinton. There's a neon sign of the motel VACANCY/NO VACANCY sort: THE CHAIRMAN IS HAPPY/THE CHAIRMAN IS NOT HAPPY. And on the wall across the room, past a bank of windows sweeping the Hudson River, hangs a knockoff of the old board game Monopoly--Weillopoly--featuring the tycoon's multitudinous properties worldwide.

This day, the chairman's sign is blinking HAPPY, and small wonder. He's just clinched a big deal, adding yet another Boardwalk to Weillopoly--otherwise known as Travelers Group, the multinational conglomerate Weill has assembled over the past decade. The latest prize: venerable Salomon Inc., one of the world's best and biggest investment banks. The $9 billion acquisition is the second largest in Wall Street history. It creates, overnight, a new global financial powerhouse, dwarfing ubiquitous Merrill Lynch & Co. and rivaling the mightiest American, Japanese and European institutions--American Express, Nomura, Deutsche Bank. Perhaps more important, it's destined to be imitated--igniting yet another round of consolidation among the world's banks, insurance companies and brokerage houses.

This is sweet revenge, indeed. For the man who's rocking what wags now call "Weill Street" was not so long ago a has been, a guy who'd risen to the top in classic rags-to-riches style--only to be shoved to the fringes. Born in 1933, the son of Polish immigrants, he worked his way through Cornell University and began his Wall Street career as a messenger for Bear Stearns. A few years later, he with several friends started his own firm. With pluck and luck and no end of his characteristic gusto--Weill cherishes a brass plaque naming him a PROFESSIONAL BUSYBODY--he began buying up small or troubled securities houses, eventually assembling the sprawling financial-services network known as Shearson Loeb Rhoades. Then, in 1981, Weill sold the whole shebang to American Express for $930 million, expecting to be named chief executive in a few years. Instead, he was sidelined. Disgusted with playing the role of what he called "Deputy Dog," he finally quit.

So began Weill's dark years on The Street. For a time he seemed to flounder. He worked seemingly aimlessly, and brooded. He made a low-ball bid to take control of Bank of America. Insiders derided it as "the 22-cent job application," the going rate for a stamp. Weill regained his fooling only when he reapplied the formula used to build his first empire: pursue financially troubled companies, drive a hard bargain, slash costs and prod the new troops to do their business better. In 1986 he bought the faltering and little-known consumer-credit division of Control Data, and turned it around. Two years later he acquired a stumbling giant, Primerica, which in turn owned Smith Barney, a securities firm that had been laid low by the 1987 stock-market crash. Then in rapid succession he took over Travelers, bought back (in a delicious irony) the Shearson brokerage group from American Express and picked up the property and casualty business of Aetna Life & Casualty--all multibillion-dollar deals.

The acquisition of Salomon caps this comeback. Weill describes it as perhaps the easiest deal he's ever done. "It went very fast," he told NEWSWEEK in an ebullient interview atop the Travelers building in the artsy Tribeca district of Manhattan. Talks began on Aug. 14, when he met Salomon's Deryck Maughan for dinner at the Four Seasons restaurant in New York. Weill then called Warren Buffett from the Adirondack Mountains upstate. The Omaha, Neb., financier owned the single biggest stake in Salomon, and without him no deal could be done. "Your timing is perfect," Weill says Buffett told him. "I hope you get it." Conversations culminated in a full-day meeting on Sept. 7, when Salomon's team agreed to a rough price. Leaving the meeting, Weill told his second in command, Smith Barney chairman James Dimon, "We could get this done." "That," Weill says, "was when I started getting scared."

Scared or not, Weill appears to have gotten a bargain. Travelers paid roughly 1.7 times book value for Salomon, which many analysts consider to be a relatively low price. "We sold Shearson to American Express for three times book," Weill says, and more recent deals on The Street have been even higher. Weill seems less pleased with his price than with the company's prospects. "This is about growth," he says over and over. His goal, as he describes it, is to build one of the world's premier financial-services firms. Acquiring Salomon is a big step. The deal joins one of the nation's largest equities houses, with 27,000 employees, with the country's leading bond dealer. With a market capitalization of $55 billion, Travelers as a whole is far larger than its chief rivals-Merrill Lynch, Morgan Stanley/Dean Witter and Goldman Sachs. It wields extraordinary investment-banking power-ranking first in U.S. municipal underwritings, second in all U.S. and international debt offerings and fourth in global equities underwriting. Salomon Smith Barney Holdings will boast one of the most highly rated teams of industry analysts on Wall Street. Weill is especially enthusiastic about new overseas markets. "Everyone is copying the capitalist system, whether in Eastern Europe, China or Latin America," he says. "The global market could become as big as the whole U.S. capital market. And we weren't there." With Salomon, he adds, "we are." Now, he feels he can steal a march on the Japanese and Europeans, whom he describes as "not offering a lot of competition."

Such talk reminds some people of the days before The Fall, when Weill spoke equally optimistically about his sale to American Express. Many chief executives have tried to meld banks and brokerage houses in recent years. Few have succeeded. One reason is that the strategy of building financial "supermarkets" that offer onestop shopping hasn't paid off. (And many analysts assume that's what Weill is aiming to do.) Sears, among others, tried and failed in the '80s with a strategy that industry types widely derided as "stocks and socks." Another problem is integrating huge companies, especially ones whose cultures differ as much as Smith Barney's and Salomon's. The former is a nationwide retail operation catering to individual investors and small businesses, the latter an institutional bond dealer that makes a huge share of its profits from the highly volatile business of buying and selling securities for its own account. It's famous for reaping huge profits in good years--and infamous for rewarding its traders well.

Some analysts suggest that could crimp Weill's buy low-cut deep style. When Buffett tried curing pay at Salomon, which he ran for a time in 1991, many of the firm's best traders left for the competition--prompting Buffett to quickly retreat. Would Weill fare any better, analysts wonder? If not, where will the cost reductions that he promises come from? What's to create the efficiencies among Travelers' different groups--some call it "synergy"--that will make the parent company more than just a big holding tank?

Weill wasn't offering any answers last week. He confirms there will be layoffs and cuts, but shrugs off talk of the difficulty assimilating his new assets. "I've got a lot of experience handling diversity," he says. And he has no intention of building a so-called "financial supermarket," noting that supermarkets have to live with low profit margins--something he clearly hates to do. He's a tiger about shareholder return. Travelers' stock price has risen 14-fold since 1986, he boasts; senior officers swear what he calls a "blood oath" not to sell their stock while working at the company.

With this, Weill suddenly gets up and flicks the switch on his neon sign back and forth. Is he signifying his happiness with that gain, or his unhappiness at talk that's dragging on too long? Either way, he's impatient to get on with his job.

'My Secrets for Success.'

Sandy Weill's winning formula is simple: target ailing companies, drive a hard bargain, slash costs and then motivate, motivate, motivate. He has built two empires by finding paydirt in other people's castoffs. In recent years he's been buying only the bluest of blue-chip companies, like Salomon. Wall Street can only guess at what he'll do next. Hint: it will be a big deal.

1960 Weill--then a 27-year-old Brooklyn, N.Y.-born stock broker and former messenger at Bear Stearns--and friends found Carter, Berlind & Weill. Under his leadership, the firm would become the Wall Street powerhouse of Shearson Loeb Rhoades by the late 1970s.

1981 Weill sells Shearson to American Express for $980 million. He serves as the latter's president from 1983 to 1985, then quits after playing second fiddle to CEO James Robinson.

"You are not here to enjoy the trappings of power," Tony Blair told bright and optimistic Labour MPs when they assembled after the election. "We are not the masters. The people are the masters. We are the people's servants."

It was a moral injunction that always was going to be hard to honour. And so it has proved. The newspapers have been full of stories. The Lord Chancellor's new wallpaper. The VIP lounge at Heathrow. The grace and favour homes. The Downing Street parties. The Blairs' new kitchen. The flakibara, said the crisis had been caused primarily by a huge inflow of foreign capital.

"The Asian economy is not in meltdown. What we have seen is a bursting of the bubble, an end of the euphoria," Mr Sakakibara said. He insisted the crisis was caused as much by reckless foreign lending to the region as anything else. "I am an advocate for deregulation and reform in Japan and everywhere, but the Asian crisis is primarily a capital account crisis," he said. "Lots of people talk about the structural problems of the region now, but they have known about these things, the chaebols (linked conglomerates of industrial interests and banks) in Korea and so on, for years but before this crisis nobody said there was anything wrong with them, rather the reverse."

Separately in the US, Federal Reserve Chairman Alan Greenspan warned Asia's financial crisis could spread to other regions of the world and said large investments were needed to quell the turmoil which bordered on panic. But Mr Greenspan pinned the blame on Asian policy-makers, saying: "At the root of the problems is poor public policy, that has resulted in misguided investments and very weak financial sectors."

Mr Sakakibara's remarks drew a robust response from Rudi Dornbusch, professor of economics at MIT in the US, who echoed the view of most Western governments in describing the troubles as "not a crisis in global capitalism, but in crony capitalism". Mr Dornbusch said the root of the problem was "very, very bad government, sleazy government unwilling to tolerate adequate rules of disclosure and independent supervision".

His view was backed by Deryck Maughan, chief executive of Salomon Smith Barney, who said it was clearly not a crisis in global capitalism since nobody was trying to get out of global capital markets, nor was there much volatility in Western markets.
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Citicorp and Travelers Group have made their first pass at a top- management structure for the new Citigroup, an initial indication of how the two organizations would meld.

A memo that the companies issued Wednesday, a month since announcing their $70 billion merger plan, had more names on it from Citicorp and Citibank than from Travelers.

But six people, four of them from Travelers, would be in charge of the three principal customer-defined business groups-consumer, corporate and investor, and asset management-reporting to co-chief executive officers John S. Reed of Citicorp and Sanford I. Weill of Travelers.

Travelers' president and chief operating officer, James Dimon, would get the title of president of Citigroup while also running the global corporate and investor business with Deryck Maughan of Salomon Smith Barney and Victor Menezes of Citicorp. Mr. Menezes would add the new title of president, Citibank.

The most detailed list of appointments was disclosed in consumer banking. William I. Campbell, Citi's global consumer chief, would retain strategic and international responsibilities, with six Citibank people reporting to him.

Travelers vice chairman Robert I. Lipp, a onetime Chemical Bank executive, would take charge of North American operations, with both Citicorp and Travelers executives heading a mix of banking and nonbanking business lines.

Thomas W. Jones of Travelers would be CEO of asset management, with Peter Carman of Citicorp as chief investment officer.

Overall, analysts viewed the announcement as an interweaving of the two giant companies without significantly altering the composition of management or providing many clues as to the personality of Citigroup.

"They just combined the management teams," said Bradley Ball, an analyst at Credit Suisse First Boston. "They haven't given any clarity on who will ultimately have authority over the future of the company."

But Mr. Ball and others said a question about succession appeared to be addressed with the presidential designation of "Jamie" Dimon, a longtime Travelers executive and protege of Mr. Weill.

Mr. Dimon's responsibilities are to include financial management and review functions. Heidi Miller, currently chief financial officer at Travelers, would take on that role at Citigroup and report to Mr. Dimon.

Mr. Ball said investors should react favorably to the financial appointments because "Travelers has had a better reputation for and a focus on costs and running a lean operation."

Even with both sides amply included in this first cut, "Citigroup shapes up as something totally new," said Seamus McMahon, executive vice president of First Manhattan Consulting Group. "It is an integrated supplier and distributor, like Home Depot, that offers a tremendous selection of products and distribution capabilities at low cost."

In a joint statement, Mr. Reed and Mr. Weill said their designations were meant to "capitalize on the unique management strengths and talents of both organizations" and "foster maximum cooperation."

Citicorp vice chairman Paul J. Collins, who is in charge of the transition effort, would be vice chairman of Citigroup. Citi's two other vice chairmen, William R. Rhodes and H. Onno Ruding, would continue to be vice chairmen of Citibank, with global commercial oversight.

Mr. Menezes, a Citi veteran who was most recently chief financial officer, would oversee global corporate banking, including traditional lending activities. He would have Citibankers Dennis Martin, in emerging markets, and Robert McCormack, global relationship banking, reporting to him.

Mr. Lipp, besides continuing as chairman of Travelers Property Casualty Co., which would be 83% owned by Citigroup, would have Citibankers Carl Levinson in mortgages, Steve Ligouri in branch banking, and Sami Siddiqui in credit cards reporting to him.

Two of Citicorp's high-level 1997 hires from outside the industry-Mary Alice Taylor from Federal Express Corp. and Edward Horowitz from Viacom Inc.-would keep their operations and technology roles.
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February 6, 1999, The Independent, Dimon seeks $42.5m share sale,
JAMIE DIMON (left), the former president of Citigroup, yesterday applied to sell 800,000 shares, worth about $42.5m (pounds 26m), in the company he abruptly left in November. Mr Dimon, 42, stunned Wall Street when he left the world's largest financial company at the request of his boss and former mentor, the co-chairman Sanford Weill. Mr Dimon's departure, a month after Citigroup's merger with Travelers Group, followed a $1.33bn trading loss at the investment banking unit he led with Deryck Maughan.
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Citigroup Inc.'s former president Jamie Dimon filed to sell 800,000 shares, worth about $42.5 million Friday, according to documents filed with the Securities and Exchange Commission.

Mr. Dimon, 42, left the world's largest financial company last November at the request of his boss and former mentor, co-chairman Sanford Weill. Mr. Dimon's departure, following a $1.33 billion trading loss at the investment banking unit he oversaw with Deryck Maughan, stunned Wall Street.

JAMIE DIMON, who quit Wall Street investment firm Salomon Smith Barney last November, has agreed a severance package of $30m with his former firm.

Mr Dimon was a well-known Wall Street figure and his departure following huge emerging market losses came as a huge shock to the industry.

Mr Dimon was widely seen as heir apparent to Sandy Weill, who steered the firm to a merger with Citicorp to create the world's largest financial services group last year. However, Wall Street insiders say that the rot set in some 18 months before when he and Mr Weill fell out over the status within the firm of the latter's daughter Jessica Bibliowicz. Deryck Maughan, the former UK Treasury official who was joint co- chief executive of Salomon's with Mr Dimon, was sidelined at the same time in favour of a new management team headed by Victor Menezes and Michael Carpenter. Mr Dimon's package includes $5.6m in cash, made up of a 1998 bonus of $4.3m and two years of his $650,000 base salary. He will also keep $6.3m of shares that he already owns and options worth $20m which he built up over the 16 years he worked for Travellers, Salomon Smith Barney's parent company before last year's Citicorp merger.
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When Allied Waste Industries Inc. announced last week its roughly $10 billion planned purchase of the much larger Browning-Ferris Industries Inc., it not only rocked the leveraged buyout community, it brought an end to a heated, ten-day battle among Wall Street bankers over who would run the financing show on the deal.

The tug of war-which ultimately boiled down to two combatants-centered on which firm would lead the financing for the roughly $7 billion of bank loans and close to $3 billion of junk bonds that Allied Waste will require to complete the buyout. On one side was Citigroup, the client's historical lender; on the other, Chase Manhattan, the historically dominant force in leveraged lending.

The stakes couldn't be higher: a huge pot of roughly $250 million in advisory and financing fees to be divvied up by Goldman, Sachs & Co. (Browning-Ferris' adviser), and Chase Manhattan, Citi's Salomon Smith Barney and Donaldson, Lufkin, & Jenrette (Allied Waste's advisers).

Equally important, though, is the stature that goes with leading such a high-profile deal-one of the LBO world's biggest since the legendary RJR Nabisco in 1988-in the highly competitive world of syndicated lending. "This wasn't only about the money," said one person close to the situation, who noted that the economics were very good for all firms involved. "This was about the glory of having your name attached to the deal."

One observer likened the situation to the madcap treasure hunt movie "It's a Mad, Mad, Mad, Mad World," in which an all-star cast (including Spencer Tracy and Jimmy Durante) spends its time elbowing one another out of the way to be the first to find the Big W in San Diego.

The Allied Waste drama also featured an extensive cast of characters, including: Allied Waste and its two biggest shareholders, buyout firms Blackstone Group and Apollo Advisors; Citi/Salomon's co-head of global loans and acquisition finance, Chad Leat, and colleague Ann Lane and James Lee, Chase's head of syndicated lending and his bankers, Rod Reed, Tom Canning and John Sorice.

The setting for much of the drama was the staid downtown offices of Manhattan law firm Fried, Frank, Harris, Shriver & Jacobson where Citi and Chase bankers simultaneously pitched their financing ideas for the lead role in the deal in nearby rooms day and night for close to a week. And while there are conflicting accounts of exactly what took place, people close to the situation say the competition was not over before telephone calls and visits from Salomon's highest ranks-including Sandy Weill and Deryck Maughan-were made to secure Salomon SB's strong role in the deal.

Citi, which had a relationship as lender with the client, was originally viewed as the incumbent for the deal. While the newly-cobbled global powerhouse swears it is committed to making this a priority, the firm is not yet a top player in the world of leveraged lending. It ranked eighth last year in leveraged loans, according to Securities Data Co.

But as one individual involved put it: "The fact is, when you're looking to borrow $10 billion and need it right away, you don't hire somebody because he wants to be there someday, you hire somebody who's there now."

Enter Lee, Chase's vice chairman and head of the bank's vaunted syndicated lending operation, who has carved out Chase's place as the preeminent market leader. Explained one person close to the deal process, "There's no doubt about it, you don't do a deal of this magnitude without calling Jimmy Lee."

That is exactly how Lee, not known for his diminutive ego, likes it. Explains one partner at a major buyout firm, "He wants to be for leveraged lending what [now defunct Drexel Burnham Lambert's] Michael Milken was for junk bonds in the late Eighties. The fact that he might have competition would be for him untenable."

Who won?

Chase was defending its turf as the long-time leader in the world of syndicated leveraged loans against a firm that has enough firepower to become a viable competitor. At the same time, Citi was trying to rebuild a name for itself in an area in which it has been virtually absent for nearly a decade.

Oddly enough, in this situation, both could claim victory.

Chase was given the role of administrative agent, as well as book manager; that means top billing in the tombstone war. But Citi also won a major role in a choice piece of business in a field in which it desperately wants to become a dominant player; winning the role of syndicated agent. Both are co-lead arrangers on the deal. Chase, Citi/Salomon and DLJ are all three joint-book managers on the high yield bonds.

Both DLJ and Citi/Salomon advised the company, and were invited to make $100 million equity investments in the deal. Chase provided a fairness opinion for the transaction.
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There is a funny little ritual that senior Citigroup Inc. executives go through these days when they introduce their colleague Robert Rubin, the former U. S. Treasury Secretary. They'll start with an insider's crack about his time at a "tiny little firm called Goldman." They'll finish with hosannas.

So it went on Oct. 17, when Citigroup vice chairman Deryck Maughan stepped up to the podium in the Salomon Smith Barney auditorium at 388 Greenwich Street, ready to introduce Citigroup's resident pop icon. A packed house of clients and Japanese investors (the event was co-hosted by the Japan Society) sat rapt, waiting for the show to begin.

"Now, if I don't do this right, I have to answer to the chairman of Citigroup's executive committee, so I've got a particularly effusive introduction prepared," said Mr. Maughan, his British accent smoothed out by the 10-plus years he's spent in Manhattan boardrooms.

Soon came the Goldman dig: "As to Bob, he is best known for his role at Citigroup, though there was a time that he was a managing partner at a smaller firm called Goldman Sachs, where we first met."

Then came the acclaim: "Bob has served his country in an extraordinary fashion, a role that President Clinton acknowledged when he awarded him the Medal of Freedom."

As usual, Mr. Rubin responded with a wry crack: "That's the whole intro? I'd hardly call that effusive--more in the neighborhood of adequate, I'd say."

Lately, this ritual has begun to take on more meaning. Mr. Rubin is in a position of great influence at Citigroup, sitting at the right hand of Sandy Weill, the chairman and chief executive. Insiders are saying, if he doesn't take the job himself, he'll be instrumental in selecting the successor to the 68-year-old Mr. Weill when Mr. Weill chooses to step down.

The circle of possible successors has been shrinking rapidly, but the contenders are believed to include Mr. Maughan; Mike Carpenter, chairman and chief executive of Salomon Smith Barney; and Victor Menezes, the Citibank chairman responsible for emerging markets.

A number of Mr. Weill's would-be successors have already departed Citigroup, including Jamie Dimon, his protege, forced out in November 1998; Robert Lipp, who headed consumer operations and remains a board member; and Joseph Plumeri, a 20-year friend and associate of Mr. Weill's.

There was also Jay Fishman, Citigroup's chief operating officer and former chairman of the Travelers Group, the conglomerate's insurance subsidiary, who announced his departure to a Minnesota-based insurance company on Oct. 11--removing another contender from the short list.

Citigroup's official position on the topic of Mr. Weill's succession is that he's not ready to leave yet and, when he does, it's an issue for the board of directors to decide. A spokesman declined comment and did not make Mr. Weill, Mr. Rubin or Mr. Maughan available for interviews.

But according to others familiar with the internal workings of Citigroup, the succession appears more and more to be an issue that Mr. Rubin may help decide--either by tipping his hand toward a candidate, or by pleasing the board of directors and Mr. Weill and accepting the position himself.

Road Show

These days, Mr. Rubin can often be found on the stump for Citigroup, the firm that gave him a home--won him, actually--after he departed his cabinet position and Washington, D.C.

Mr. Rubin will usually speak for 30 minutes, being careful to say very little of note. He'll mention the federal surplus, urging that the pot of money he helped build up under President Clinton be preserved. He'll admonish against excessive tax cuts, offering the opinion that this is not the way to go.

As to the future--well, it looks cloudy. "Before Sept. 11, our economy was faced with many economic imbalances: overinvestment by businesses, high levels of consumer debt and, until recently, the high level of the stock market," Mr. Rubin noted on Oct. 17. "The events of Sept. 11 have added to all this. In my view, the likelihood of a considerable period of economic uncertainty has increased."

He was the master, as usual, of self-deprecation, prefacing many of his comments with "I'm no expert" or "There are others who know much more than me." In place of specifics--"If you could just tell us, Mr. Rubin, what you are investing in these days," cooed CNBC anchor Consuelo Mack, who was moderating the session--Mr. Rubin merely offered that smile.

The low-key Rubin charm was, however, lapped up by the audience of Japanese investors and clients. And they are not alone. Everyone, it seems, from Republican Senators to Treasury Secretary Paul O'Neill to Federal Reserve chairman Alan Greenspan--to say nothing of those on Mr. Weill's short list--wants to bask in the warmth of his still-very-considerable glow.

But around Citigroup, it's more than his easy charm or even his title: chairman of the executive committee of the Citigroup board. It's Mr. Rubin's proximity to Mr. Weill in the power structure (he is the second member of the office of the chairman, Citigroup co-chief executive John Reed having been the third until he was forced out by Mr. Weill in February 2000), as well as his physical proximity (his corner office abuts Mr. Weill's at Citigroup's midtown headquarters).

And it's also his apparent closeness to Mr. Weill. Mr. Rubin has emerged as the Citigroup C.E.O.'s alter ego, his embodiment of the perfect Wall Street man--a throwback, perhaps, to an old-line, clubbier type of banker that Mr. Weill seems to admire. Unlike Mr. Weill, Mr. Rubin conquered the Street from inside the boardroom--relying on his suavity, his trader's acumen and those perfect grace notes. And he's here to stay, searching now for an apartment, as he mentioned in his speech.

Handing over the reins of Citigroup to him would be the perfect capstone to Mr. Weill's career. But the beauty of Bob Rubin is that he professes no interest in the position. It's why he's climbed to such heights: He has mastered the art, rare in banking and politics, of hiding the rawness of one's ambition. He became Treasury Secretary by seeming not to want it; now his almost blase disregard for the Citigroup post makes Mr. Weill and his board all the more desperate to give it to him. Meanwhile, those who really want it seem positively shrink-wrapped as they fight for it.

So far, Mr. Weill has yet to show his hand, and he seems in no hurry to do so--indeed, he announced that no one would replace Mr. Fishman in his Citigroup corporate position. And while Mr. Weill has said that he hopes to appoint a successor by 2002, nothing has been formalized. The board itself--stacked with friends and supporters of Mr. Weill, and more than happy with the stock's performance under his leadership--seems ready to defer to him on the issue.

Meanwhile, it's anybody's race--and for the moment, at least, Mr. Maughan, 53, is putting his best foot forward. In appearance, he's as smooth as a banker comes: tall and strapping, his suit always the darkest of blues, his silvery coif always very well maintained.

His rise to the top has been an unorthodox one. Ten years ago, he was an obscure managing director for Salomon Brothers, working out of the firm's Tokyo offices. He hit the ground at Salomon in 1983 as a bond salesman, having worked for 10 years before that in London at the British Treasury.

When Salomon chairman and chief executive John Gutfreund was forced out in 1991 because of the Treasury-note auction scandal, then-shareholder Warren Buffet needed a fresh new face, one free of the old take-no-prisoners Salomon taint. After a 10-minute interview, he selected the British-born Mr. Maughan to reinvent the disgraced firm.

It was a difficult task, and Mr. Maughan made enemies in the process as he steered Salomon away from its ballsy, bond-trading roots to the more disciplined, broad-based and less controversial firm that Mr. Buffet wanted it to be. In 1997, Mr. Maughan smartly got Mr. Weill, then the chairman of Travelers--whom he knew from their directorships for Carnegie Hall--to buy his firm for $9 billion.

At the time, the deal was hailed as another Sandy Weill stroke of genius: 1.7 times book for Salomon Brothers and its swank offices in London and Japan. Mr. Weill had always wanted to go global; now he'd be doing it on the cheap.

Then came the Asian crisis and $395 million worth of global bond-trading losses. Ooops. In November 1998, the long knives came out. Mr. Dimon--who together with Mr. Maughan had been co-chief of Citigroup's investment-banking operations under the Salomon Smith Barney rubric--was ousted, and Mr. Maughan was bumped upstairs and given the vaguest of briefs: advising Citigroup on strategy.

Mr. Maughan is, however, a notorious cultivator of powerful friendships. Charming Mr. Buffet had firmly installed him at the top at Salomon, and Mr. Maughan seemed bent upon doing the same with Mr. Weill. He took over responsibility for Citigroup's Internet strategy after Mr. Reed was forced out in 2000 and was given mergers and acquisitions as well--a nice charge to have when working for the acquisitive Mr. Weill. He is also a man about town, still serving on the Carnegie board with Mr. Weill, as well as in directorships at the Lincoln Center Theater and Mt. Sinai Hospital.

Now, with Citigroup on the prowl for more acquisitions and increasing emphasis being placed on its international operations, could it be that Mr. Maughan's ship is finally docking?

International Links

"There is no question he is on the short list," says Michael Holland, a money manager and former Salomon Brothers colleague of Mr. Maughan's. "The stars surrounding Sandy Weill always wax and wane. Whenever he decides to exit stage right, whomever's most luminescent will be the next C.E.O. In Deryck's case, it is his international background that is very big in his favor. And I would not underestimate the importance of the Deryck Maughan schmooze factor. His ability to forge the important corporate relationships has always been nonpareil. He identifies them, homes in on them and makes them."

So Mr. Maughan was surely beaming when Mr. Rubin, during his Q&A with the audience on Oct. 17, talked a bit about Citigroup and its mergers-and-acquisitions activities. "We need to take the long view. There is no question that we would be receptive to acquisitions in strategic emerging markets at prices deemed appropriate to Citigroup," Mr. Rubin said. Then he added, with a nod of his head to Mr. Maughan, sitting in the front row: "But you should ask Deryck. He is in charge of M&A, amongst other things at Citigroup."
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January 4, 2002, American Banker, People, by Niamh Ring, David Boraks,

POWER AND PRESTIGE OOZE from the corporate pores of Citigroup. Its board of directors resembles a "who's who" of U.S. business executives. A former Secretary of the U. S. Department of Treasury -- Robert Rubin -- is a director and chair of Citigroup's Executive Committee. Former President Gerald Ford lends his name as an honorary director. And Citigroup is probably the only financial services holding company that can claim a British knight among its top executives. Citigroup's Vice Chair Deryck Maughan was awarded a knighthood by the Queen of England earlier this year in recognition of his contribution to British and U.S. business.

But don't let this star-studded collection of corporate executives, high-level politicians and knights suggest that Citigroup doesn't focus on citizens on lower rungs of the economic and social ladders. In fact, Citigroup has invested tens of billions of dollars in schemes to peddle various financial products to low and moderate income families and persons with blemished credit histories.

Just good corporate citizenship and a commendable effort to reach out to the poor? That's what Citigroup says. As part of its effort to garner support for the Citibank-Travelers Group merger that gave birth to the present corporate giant, Citigroup promised in 1998 to lend and invest $115 billion to low- and moderate-income households over a 10-year period.

"Since making the commitment," brags Pamela Flaherty, senior vice president for global community relations at Citigroup, "our community lending and investing has grown by more than 140 percent, increasing from $8.5 billion in 1997 to $21 billion in 2001. In the fields of mortgages, small business and community development, we grew from $3.4 billion in 1997 to $12 billion in 2001 -- a figure that represents an increase over five years in lending activity of 250 percent. In addition, we leveraged our partnerships to further extend our reach to thousands of low- and middle-income and minority families, new immigrants, underserved households and other emerging markets across the country."

Matters look quite different, however, in the eyes of federal and state law enforcement agencies and grassroots community organizations which charge that consumers are being ripped off through deceptive predatory lending tactics employed by Citigroup subsidiaries.

WATCH YOUR ASSOCIATES

Citigroup became the nation's largest predatory lender when it acquired Associates First Capital Corporation in September 2000 and merged it with another of its subsidiaries, CitiFinancial Credit.

At the time of the merger with Citigroup, Associates was one of the largest "subprime" lenders in the United States. It had outstanding consumer loans of nearly $30 billion, according to 1999 corporate records. Included were 480,000 home equity loans and more than three million personal loans.

Subprime borrowers with blemished credit histories are considered high risk. "Predatory" lenders take advantage of the subprime borrowers' vulnerability and weak bargaining position, charging them inflated interest rates, attaching costly "add-ons" like credit insurance and luring them into unaffordable repayment plans.

Even when they scrape up every possible penny, the combined weight of the high interest charges, fees and add-ons become too much for many working families and particularly for senior citizens on fixed incomes. This is particularly true when the charges grow astronomically; lenders "flip" loans in a series of refinancing transactions, all carrying a new round of fees and other charges. The end result, too often, is foreclosure and the loss of the home.

Associates First Capital is proving to be much more costly than just the $31 billion that Citigroup plunked down for its acquisition. The spotlight on Associates First Capital's predatory practices has also shed light on Citigroup's overall performance in low- and moderate-income neighborhoods throughout the nation in recent years.

The result has been a public relations and legal nightmare for the Nation's premier financial services holding company. The biggest blow came from the Federal Trade Commission, which filed a lawsuit last year against Associates First Capital, Citigroup and CitiFinancial Credit Company, charging widespread abusive lending practices and violations of the Truth in Lending Act, Fair Credit Reporting Act and the Equal Credit Opportunity Act.

Jodie Bernstein, director of FTC's Bureau of Consumer Protection, said Associates engaged in a variety of deceptive practices.

"They hid essential information from consumers, misrepresented loan terms, flipped loans and packed optional fees to raise the costs of the loans," Bernstein charged. "What had made the alleged practices more egregious is that they primarily victimized consumers who were the most vulnerable -- hard-working homeowners who had to borrow to meet emergency needs and often had no other access to capital."

Citigroup has tried desperately to deflect the legal and public relations problems by suggesting that all the really bad practices had been the work of Associates First Capital before it became a member of the Citi family. The corporation feigned "shock and dismay" that such practices had been going on and urged the Federal District Court in Atlanta to dismiss Citigroup and its consumer finance unit, CitiFinance, from the FTC lawsuit.

Instead of extricating Citigroup and its affiliates from the lawsuit, the dismissal motion dug the hole deeper for the corporation. FTC produced affidavits from a former employee charging that the corporation's consumer lending affiliate CitiFinancial had engaged in unethical lending practices long before Associates First Capital had been acquired. The court refused to sever Citigroup and its consumer credit affiliate, CitiFinancial from the suit.

According to the FTC complaint, the Associates charged its customers prices that were substantially higher than those available to borrowers in the prime market. The FTC said Associates charged as many as eight points on mortgage loans -- each point equaling 1 percent the amount financed -- on top of inflated fees.

The FTC said that Associates obtained customers through a wide range of schemes. Among these were the mailing of "live checks" (which automatically triggered a high interest loan when endorsed) and the purchase of retail installment contracts from sellers of consumer goods.

Once ensnared in the Associates network, customers were aggressively solicited to take out new loans and to refinance existing debts by flipping them into a single debt consolidation loan, according to the FTC. The FTC complaint charges that customers were duped in many cases by false statements that debt consolidation loans would lower their monthly payments and save them money. FTC said that Associates trained employees to tell customers there would be no out-of-pocket-fees or up-front out-of-pocket costs when, in fact, the loans came with high points, closing costs and in many cases with costly credit insurance premiums.

MOUNTING PRESSURE

The Federal Trade Commission is not the only consumer cop chasing Citigroup's lending practices. Last year Citigroup paid $20 million to North Carolina customers of Associates and $300,000 to the state to settle allegations that consumers had been tricked into buying expensive and unneeded credit insurance as part of their mortgage loans. The North Carolina Attorney General launched an investigation of the practices after the state became the first to pass laws against predatory lending.

The New York Times reported last fall that Citigroup had settled 200 lawsuits pertaining to practices of Associates First Capital with at least twice that number still pending in the courts.

Meanwhile, community groups have developed more and more detailed information upon which to indict Citigroup's lending practices. The National Training and Information Center in Chicago (NTIC) studied 1999 data collected under the Home Mortgage Disclosure Act in nine cities and concluded that Citigroup operated a two-tier loan system -- an affordable prime loan system for more affluent communities and a high-interest subprime scheme available through its consumer loan affiliate -- CitiFinancial -- for working class and poor communities.

The California Reinvestment Committee charged in testimony before the New York Banking Commission that Citibank has ignored California's low-income communities and communities of color in providing affordable non-predatory financial products.

Citibank "targets its products to upper-income customers, thereby abandoning the financial opportunities of the entire market and a full range of range of products," Alan Fisher, the Committee's executive director, told the New York Commission. "The bank has systematically eliminated low-cost products that are specifically designed to meet the needs of low-income consumers."

As evidence of Citi's misdeeds grows, organizations such as the Association of Community Organizations for Action Now (ACORN), the Center for Community Change, the National Community Reinvestment Coalition and other community groups -- which have long fought abusive lending practices -- are finding new non-profit organizations allies.

Social Investment Forum Foundation and Co-op America launched a web site (www.tellcitibank.org) early in 2001 called "Tell Citibank" which has kept up a steady drum beat about Citigroup and predatory lending. The site gives concerned citizens an opportunity to speak out about abusive lending practices.

Included on the site are summaries of victims of predatory lending practices from around the nation. One profiles Beatrice Smith, a 68-year old African-American from Atlanta who took out a $20,334 mortgage on her home in 1987. Her loan was flipped (refinanced) six times in as many years, bringing the final loan amount to $35,000. She paid for credit life insurance all six times with each premium exceeding $2,300.

The web site also tells the story of a couple that missed a monthly payment on their sub prime loan, causing the mortgage interest rate to jump from 14 to 24 percent. And a Brooklyn woman was given a loan even after she lost her home-health-aide job. The lender falsely listed her income as $50,000.

About the stories on tellcitibank.org, Citibank spokesperson Christina Pretto says, "A lot of their stuff is out of date," and has been addressed in Citigroup reports on its reforms.

Responsible Wealth, a project of United for a Fair Economy, has urged a shareholder resolution that would link a portion of executive compensation at Citigroup to addressing predatory lending practices. Among the factors to be considered would be implementation of policies to prevent predatory lending; constructive meetings with concerned community groups; and reductions in predatory lending complaints filed with government bodies.

In January, National People's Action (NPA) organized a protest in front of the home of the president and CEO of the Central Region of Citibank in Chicago demanding, among other things, a meeting with Robert Rubin, chairman of Citigroup's Executive Committee about predatory lending -- a meeting yet to take place.

Inner City Press, a leading community group in New York City, maintains a web site entitled The Citigroup Watch (www.innercitypress.org/citi.html) which tracks the corporation's lending practices around the nation. The lengthy reports are spiced with internal memorandums and comments leaked from inside Citigroup.

CITI RESPONDS

The lawsuits, the action by FTC and the pressure from community groups is having an effect. Citigroup has taken some moves to clean up its act and to settle the rash of lawsuits which have been filed against Associates First Capital.

For example, the company has suspended the highly controversial practice of requiring consumers to swallow single premium credit insurance with every loan. The corporation has also modified its prepayment penalties: Customers are now given the choice of a "standard" interest rate with a prepayment penalty or an interest rate 50 basis points higher without a prepayment penalty. Prepayment penalties are often extremely costly to borrowers stuck with a high interest loan. With high prepayment penalties, these borrowers cannot refinance if interest rates go down or if they find institutions to refinance at lower rates and fewer fees.

Last October, Citigroup released the third in a series of "Real Estate Lending Initiatives Reports." The report says "initiatives" are "ongoing" in addressing sales practices, compliance procedures, broker standards, and foreclosure policies.

The report says "concern exists that lenders do not effectively monitor brokers, who may be charging high fees, using fraudulent and abusive sales tactics, targeting unsophisticated customers, packing loans with needless additional, costly products and flipping existing customers into higher cost loans." The report says that CitiFinancial has initiated an aggressive process to ensure that the brokers and correspondents with whom it does business meet what it describes as "CitiFinancial's high ethical standards."

Says Pretto, "The effort to shift from offering single-premium to offering monthly pay insurance products is well underway.

And, she adds, "a lot of Associates' business was broker-based. We have severed relationships with more than 3600 brokers who did business with Associates for a variety of reasons. One of the most common reasons was because they declined to conform to our code of conduct. By severing our relationship with those brokers we've in effect foregone hundreds of millions of dollars in business."

For fair-lending advocates, the reforms at Citi are not proof that the financial goliath is finally intent on ending predatory practices and fulfilling its obligations to make credit available in low- and moderate-income communities, but they do show that pressure works. Even Citigroup, despite its interlinkage with government officials and financial might, can be forced to respond to sustained, energetic, savvy and multi-pronged citizen campaigns.

Excerpts from the Federal Trade Commission complaint against The Associates First Capital, now owned by Citigroup:

The Associates emphasized "upselling" homeowners to home equity loans. Through marketing and solicitation tools used to convince customers of the benefits of refinancing, The Associates induced customers to refinance their existing consumer credit debts into a single debt consolidation loan, typically a home equity loan, a practice known as "flipping." These marketing and solicitation tools repeatedly stressed that a debt consolidation loan would benefit customers, for example by lowering their monthly payments, requiring them to pay less interest, allowing them to own their homes sooner, and saving them money. These claims were often false. To dissuade customers from shopping around for a more affordable loan, The Associates trained its employees to "take [customers] out of the market" by assuring customers they will be approved for the proposed loan.

The Associates created and trained its employees to use the What If? and Equity Advantage Plan ("EAP") programs, and similar solicitation tools, to compare the customer's current debts with one or more Associates loan proposals and to demonstrate the "benefits" of consolidating the consumer's debts with an Associates loan, typically a home equity loan. In many instances, The Associates used the consumer report in the customer's current loan file for this purpose. The What If? program was most often initiated with a telephone call from an Associates employee, asking the customer, for example, "what if I could show you a way to ... Save $XXX each month? ... Save $XXXX in the total interest charges on your current debts? ... Establish a savings account in the amount of $XXX...." If the customer showed interest, the employee typically met with the customer in person to present the EAP, a preprinted worksheet comparing the customer's current debts with The Associates' proposed loan, and indicating the "Money Saved " with The Associates' loan.

The What If? EAP, and similar solicitation tools, did not accurately compare a customer's current debt load with The Associates' debt consolidation home equity loan, and therefore the purported savings and other benefits were misleading. For example, in comparing the customer's total monthly payments on his current debts with the monthly payment on the proposed loan, these solicitation tools assumed the same monthly savings over the full loan term, typically 15-20 years, even though customers' current debts often included short term debts (e.g., personal installment loans, automobile loans, and credit card debts) that likely would be paid off within five years. These solicitation tools sometimes purported to show savings even where the consumer's current debts had lower interest rates than the proposed loan. In addition, in representing the monthly savings from consolidating a customer's first mortgage and other debts, the What If? and EAP programs failed to account for property taxes and homeowner's insuranc e that The Associates' customers were required to pay out of pocket. Most mortgage lenders include in a customer's monthly payment an escrow amount for property taxes and homeowner's insurance, but The Associates did not. The What If? And EAP programs calculated monthly savings from The Associates' debt consolidation home equity loan without factoring in this out-of-pocket cost to consumers.

Source: Federal Trade Commission v. Citigroup Inc. et. al., Complaint for Permanent Injunction and Other Equitable Relief, filed in the U.S. District Court for the Northern District of Georgia, March 6, 2001.

... AND CITIGROUP'S RESPONSE

AFTER CITIGROUP failed to convince the Federal Trade Commission to drop its suit against its newly acquired subsidiary the Associates, it released this statement:

We regret that we have been unable to resolve the FTC claims regarding past practices of the Associates without litigation.

From the time we announced our intent to acquire Associates, we indicated our full commitment to resolve concerns that had been raised about their business. We have fulfilled that commitment by implementing CitiFinancial operations and compliance systems throughout the former Associates' branches and establishing processes by which customers of the former Associates can have any issues addressed. To date, we have reached out to nearly a half million customers, including every Associates home loan customer, and we will continue these outreach efforts.

Further, we dedicated ourselves to implementing enhanced practices, procedures and compliance not only within former Associates operations but throughout our entire consumer finance business. We are proud of the progress we have made on these initiatives, which establish us as the best practices leader in the industry.

Consistent with this commitment we also have tried to resolve the FTC's concerns about The Associates' past practices. We are hopeful that the FTC will come to recognize that its decision to pursue this case is counterproductive to our shared objective of ensuring access to credit for those who need it most according to consumer protection standards that lead the industry.

Jake Lewis is a banking specialist at the Center for the Study of Responsive Law.

Sandy Weill, chairman and chief executive of Citigroup, has promoted Deryck Maughan to headup a new international division as part of a new management initiative.

Maughan, currently head of Citigroup Japan, is to become chairman and chief executive of Citigroup International - a new unit comprising the bank's business in Europe, Middle East, Africa, Asia, Japan and Latin America.

He will share his responsibilities with the bank's product heads. Weill hopes that the matrix structure of overlapping regional and product heads will help it market products more effectively around the world. Weill said: 'Our new corporate structure reflects our belief that effective control and coordination between our product functions and global geographic businesses is increasingly critical to our success.' The jobs of the product heads remain largely unchanged with small exceptions. Michael Carpenter, chairman and chief executive of global corporate and investment banking, adds transactions services to his existing responsibilities of private banking and corporate and investment banking.

Bob Willumstad, who heads Citigroup's global consumer group, continues to oversee credit cards, consumer finance and branch banking. But he also takes regional charge of the bank's North American businesses including Mexico and Puerto Rico. Tom Jones, who heads up global investment management and private banking, continues to oversee asset management, private banking, life insurance and annuities.Victor Menezes, moves from heading emerging markets to become senior vice chairman of Citigroup with responsibility of managing relationships with many of the firm's important customers and with government regulators. Menezes also will take responsibility for Citigroup's mergers and acquisitions as well as human resources responsibilities such as management development programs, and recruitment outside the US.
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STANDARD Chartered revealed that it had lost out on the biggest ever foreign investment opportunity in South Korea yesterday - as it found itself at the centre of renewed bid speculation.

The London-based bank was runner-up to Citigroup in the US dollars 2.7 billion (GBP 1.5 billion) race to land KorAm Bank - South Korea's sixth-largest financial institution.Separately, news of the death of Standard Chartered's single largest shareholder prompted yet more questions about the bank's future ownership.

South Korea is considered by many analysts to be one of the major new banking markets opening up in Asia. Standard Chartered is focussed almost entirely on Asia, where it has always made most of its money.

Citigroup is to acquire a 36.6 per cent stake in KorAm held by US investment firm Carlyle Group, becoming the first foreign bank to make a major move into Korea.

Standard Chartered is currently the second-biggest shareholder in KorAm, with a 9.8 per cent holding. It is now expected to sell out to Citigroup. Citigroup aims to buy more than 80 per cent of KorAm from the Carlyle consortium and on the open market. KorAm has 222 domestic branches and total assets of GBP 19bn.

Deryck Maughan, chairman and chief executive officer of Citigroup International, said: "Korea is a strategic priority for Citigroup. The combination of KorAm and Citigroup will create a leading local bank with global capabilities."

Separately, Khoo Teck Puat - one of three financiers who rescued the Asian-focussed bank from a hostile bid from Lloyds in 1986 - died on Saturday in Singapore.

His 13.4 per cent stake in Standard Chartered - worth about GBP 1.5bn - may now be snapped up by a potential future bidder, analysts said, with Barclays and Citigroup mooted as possibilities. Singapore's DBS has also been tipped as a possible bid candidate. Khoo, 87, indicated last October that he may be willing to sell his Standard Chartered stake.

Anthony Lok, an analyst at BOC International in Hong Kong, said: "If you say you want to expand in Asia or emerging markets, [Standard Chartered] has a very unique footprint, not replicable in many places."
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The ouster followed a review by an outside consulting group of problems in Citigroup's private banking operations in Japan, which prompted Japanese regulators to close the operations, the paper said, citing an unnamed source close to the matter. The group found that all three departing executives shared blame for the problems.

The memorandum said that effective immediately, Citigroup President Robert Willumstad would take charge of the businesses run by the three departing executives.
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Citigroup Inc. said late Tuesday that three of its senior executives, including Sir Deryck Maughan, were leaving the company.

A person familiar with the situation said the three, including Thomas Jones, the head of Citi Asset Management, and Peter Scaturro, the head of Citi's private bank, were fired after an independent investigation into the circumstances that led to the private bank being shut down in Japan by regulators there. Sir Deryck was the head of Citigroup International.

Last month regulators ordered Citi to shut down its private bank in Japan after uncovering lax controls over client accounts. The investigation and the report, by Promontory Financial Group, concluded that the three executives shared responsibility for the situation in Japan.

Charles O. Prince, the chief executive officer of Citi, wrote in a terse memorandum to employees Tuesday that he wished the three executives well. He mentioned nothing about Japan but said, "We count on everyone in each of these businesses to work hard to ensure a smooth transition."

In recent weeks Mr. Prince has talked sternly about the need to shore up compliance and accountability after a series of embarrassments, including a questionable bond trade by its London trading operations and the Japan scandal. Last week he sought to reassure investors that matters related to Japan were being handled.

"This is something that will not continue in this company, certainly while I am in charge," Mr. Prince said during an earnings conference call last week.

Citi said that starting immediately, Citigroup Asset Management, the private bank, and Travelers Life and Annuity will report to Robert Willumstad, the company's president and chief operating officer. On Nov. 5 the private bank will report to Todd Thomson, who that day will also assume command of Smith Barney. Mr. Thomson is currently the chief financial officer. He is switching assignments with Sallie Krawcheck.

Oct. 20--NEW YORK -- Citigroup Inc. has forced three senior executives to leave the company in connection with a scandal involving its private-banking operations in Japan, U.S. media outlets reported Tuesday.

According to the reports, the three are Deryck Maughan, vice chairman and head of Citigroup's international operations, Thomas Jones, head of its asset management division, and Peter Scaturro, chief executive of its private banking operations.

Last month, the Japanese Financial Services Agency ordered Citigroup to withdraw from the private banking business in Japan by the end of September 2005 after finding local Citibank offices have engaged in a number of illegal business activities, including extending loans used to manipulate stock prices.
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Oct. 20--Citigroup CEO Charles Prince conducted an unheralded housecleaning of the top ranks of the world's largest bank in the wake of a scandal that forced the firm to close its private bank in Japan, sources said.

After an independent firm conducted a review of events surrounding the scandal in Japan, sources said Prince sought the ouster of three of his senior-most staffers.

A fix-it man for ex-CEO Sandy Weill, Prince has pushed to burnish the firm's image amid numerous scandals, including its role in providing biased research. He announced the departures in a terse memo late yesterday.
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In London, the FTSE 100 was down 34.10 to 4621.10 recently after a negative session in the U.S.

In Japan, the Nikkei plummetted 182.68, or 1.7 percent to 10882.18, a three-week low, following a fallback on Wall Street, triggering a sharp sell-off.

In U.S. corporate news, Citigroup Inc. ousted Vice Chairman Deryck Maughan and two other senior executives in connection with a recently disclosed scandal involving its private-banking operations in Japan.

Fannie Mae, in a disclosure filing with securities regulators, confirmed that the Securities and Exchange Commission has opened a formal investigation into the company's accounting practices.

Motorola Inc. posted third-quarter earnings that beat Wall Street estimates by a penny but fell short of sales estimates by nearly $60 million.

Pervasive Software Inc. posted lower-than-expected revenue. Pervasive said net income was $800,000, or 3 cents a diluted share, compared to net income of $1.4 million, or 8 cents a diluted share in the year-ago period.

For Wednesday, AMR Corp. is expected to report third-quarter earnings of $1.51 a share while Allstate Corp. is expected to report third-quarter earnings of 30 cents a share after the market closes.

Altera Corp. is expected to report third-quarter earnings of 18 cents a share after the market closes. Bausch & Lomb Inc. is expected to report third-quarter earnings of 73 cents a share at 8 a.m. EDT.

Corning Inc. is expected to report third-quarter earnings of 11 cents after the market closes. Colgate-Palmolive Co. is expected to report third-quarter earnings of 58 cents a share before the market opens.

No economic news is on tap for Wednesday.

Stocks fell, with Aetna Inc., Cigna Corp. and UnumProvident Corp., especially weak as the probe of insurers appeared to be taking a bigger turn toward health-care providers.

Even strength by International Business Machines Corp. and Texas Instruments Inc. couldn't lift the market.

The Dow Jones Industrial Average dropped 58.70 points, or 0.59 percent, to 9897.62 and the Nasdaq Composite Index lost 13.62, or 0.7 percent, to 1922.90. The Standard & Poor's 500 Index fell 10.79, or 0.97 percent, to 1103.23, continuing its seesawing between positive and negative territory. The index is now back in the red for the year.
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Citigroup Inc.. the financial services giant, confirmed on Wednesday that it was removing three senior executives in the wake of a banking scandal in Japan.

The bank released a memo from chief executive Charles Prince saying that Sir Deryck Maughan, a Citigroup vice chairman and head of Citigroup International, would be leaving the company. Also departing will be Thomas W. Jones, chairman and chief executive of the global investment management division, and Peter K. Scaturro, head of Citi's private bank, the memo said.

"All have been members of our senior management team for years, and we wish them well," Prince said in his memo to employees.

In early treading on the New York Stock Exchange, its shares were down 72 cents at $42.87.

The move followed Japan's decision last month to order Citibank to close its private banking operations in the country.

Japan regulators charged that Citibank employees failed to prevent transactions that may have been linked to money laundering, extended loans used to manipulate publicly traded stock and misled customers about the risk of some products. Citibank is expected to submit a corrective action plan within days.

The ouster followed a review by an outside consulting group of problems in Citigroup's private banking operations in Japan, The Wall Street Journal reported.

Maughan, 56, had been with Citigroup or its predecessor companies since 1983. Jones and Scaturro were both members of the Citigroup management committee.

The memo from Prince said that Citigroup President Robert Willumstad would take charge of the businesses run by the three departing executives.
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ALMOST any story which appears on the financial pages of our national newspapers could move markets.

Indeed, by disseminating information about companies, shares and the economy, the City pages play a role in the price formation process.

Newspaper articles - whether they are in the Financial Times, the Daily Mail or other publications - have an impact on share prices on a daily basis.

Imagine then that each time a story was written and a share price went down, the firm concerned felt that it could sue the pants off us.

If financial journalists became too afraid to write critical pieces, then readers and investors could soon be deprived of legitimate information.

That is why the decision by Mr Justice Tugendhat to strike down the claim by stockbrokers Collins Stewart for [pounds sterling]230.5m of damages is vital to the freedom of the press.

Collins Stewart claimed that an FT article, which made disputed allegations against the broker, led to a sharp fall in its share price. It demanded the paper make up the price difference in a lawsuit that would have cast a cloud over the future viability of the FT and opened a chasm in the accounts of its parent Pearson.

Fortunately Mr Justice Tugendhat saw the case as a 'waste of time'.

FT Editor Andrew Gowers should be applauded for not caving into the pressure from Collins Stewart. As he has noted, it would have been a 'very dark day for journalism' had the action been allowed to proceed.

The FT is not yet out of the woods. It still faces a libel case and Collins Stewart alleges that the overhang of the damage to the firm's reputation done by the original FT article has soared from around [pounds sterling]8.5m to [pounds sterling]37m. That will now have to be decided at a full trial before a judge and jury.

The job of assessing the final damages - if the jury were to find against the FT - will be in the hands of a judge. That should at least prevent some of the bizarre awards seen in past libel actions.

Budget hole

HOW worried should we be about the public finances? By this stage of the financial year, they should be improving strongly if the Chancellor is to meet his Budget promise of [pounds sterling]33bn of net borrowing this year.

But with five months of the financial year gone, the budget deficit has reached [pounds sterling]22.8bn, which is where it was at the same stage of last year.

The deficit in September, at [pounds sterling]5bn, is way above City forecasts.

Predicting the outcome of the public finances is difficult. It is particularly hard this year because of special factors.

Revenues are benefiting over the short term from the buoyancy of the oil price, which on current trends could add [pounds sterling]3bn or more to government coffers in 2004-05.

Working in the other direction are the ongoing costs of the Iraq war over which the Treasury has little direct political control.

So far the costs are estimated as at least [pounds sterling]7bn, but the conflict is far from over.

What is as interesting are the underlying trends. For borrowing to come down this year it is critical that revenue targets are met.

Best estimates suggest that tax receipts are rising by just over 7pc, which is not too far off the estimates in the Budget. If growth in tax receipts were to continue at this pace for the rest of the year, the Treasury can probably scrape through without its numbers being questioned.

But that assumes that the economy continues to grow at a healthy clip. There are questions about this given the rise in oil prices and the recent surveys pointing to a manufacturing and services sector slowdown.

There are now real concerns that Gordon Brown's 'golden rule' which requires borrowing only for investment over the economic cycle, will be breached. Then the Chancellor will have no choice but to raise taxes if fiscal credibility is to be maintained.

But no one should expect Brown to concede this point until after the election.

Citigroup coup

THE overnight departure of Sir Deryck Maughan as international chairman of Citigroup removes from office the most senior British banker on Wall Street.

Maughan is paying the price for Citigroup's regulatory problems in Japan.

But no doubt Citi's byzantine internal politics played a part.

No one should forget that it was Maughan who essentially steered Salomon Brothers out of the bond market scandal it faced in the 1990s and safely into the hands of Citigroup.

Despite the circumstances of his resignation it would be surprising if there were not a queue of banks and companies on both sides of the Atlantic ready to trust his hand on the tiller.

Three senior executives at Citigroup have been forced to resign as Charles Prince, the company's chief executive, has delivered on a promise to improve the bank's sullied reputation after its private banking operations were shut down in Japan last month.

The resignations, which came on Tuesday, were submitted by Deryck Maughan, the chairman of Citigroup's extensive international operations; Thomas Jones, the head of the bank's asset management division; and Peter Scaturro, the chief executive of private banking. All were members of the firm's management committee, and their departures represent the most significant exodus of top executives since Prince succeeded Sanford Weill as chief executive a little more than a year ago.

The dismissals were announced in an internal e-mail message sent to Citigroup employees on Tuesday evening. The message stated that the asset management and private banking units of the bank would report immediately to Robert Willumstad, president and chief operating officer of Citigroup. Last month, Citigroup was forced to close its private banking operations in Japan after regulators found that a lack of internal controls enabled certain employees to engage in fraudulent transactions. Prince and the bank, already facing the prospect of suits from Enron creditors and charges of irregular bond trades in Britain, then hired Eugene Ludwig, a former comptroller of the currency at U.S. Treasury to conduct an internal review of the matter.

According to a person briefed on the review, its conclusion was that Jones, Scaturro and Maughan should be held responsible for lack of oversight in Japan. Jones, Scaturro and Maughan could not be reached for comment late Tuesday. Scaturro reported to Jones, and the two executives had broad responsibility for the bank's private banking operations in Japan. The departure of Maughan, whose responsibility for the Japan operations was less direct, underscores the extent to which Prince is willing to burrow deep into Citigroup's executive suite in his drive to enforce a culture of accountability at the sprawling financial institution.

Maughan's departure could be seen as all the more embarrassing because he styled himself as a Japan expert of sorts. Until recently, he was responsible for all of Citigroup's business in Japan. Recently knighted, Maughan has frequently socialized with Weill and is a trustee with him at Carnegie Hall. Maughan's stature at the bank derived in large part from his close relationship with Weill, who remains chairman. And, though the dismissals bore the stamp of Prince, a lawyer who for years worked alongside Weill to build Citigroup into a financial colossus, they were imposed with the full knowledge of the board and Weill, a person close to the board said Tuesday.

In recent months, Prince has become increasingly frustrated with the seeming drumbeat of ethical and regulatory lapses at Citigroup, and on a recent conference call with analysts he said that such behavior would be dealt with in the near future. ''I just want to make it very clear to all of you that for all of us, examples like that are simply not acceptable,'' he said, referring to the sanctions in Japan, while adding that action had been taken and that there would be ''more to come.''

Although the closing of the Citigroup's private banking operations in Japan will barely dent the bank's net profits, which were $17 billion last year, the ignominy of the world's largest financial institution having its private bankers expelled from such an important market, together with the other regulatory lapses, has cast a pall over the bank and its stock price.

Citigroup's stock has been a weak performer during Prince's reign, and the resulting low valuation has made all the harder for the bank to make the acquisitions that were Weill's trademark and that analysts say are necessary to keep the bank growing at an acceptable pace. Shares of Citigroup fell 63 cents, to $43.59 on Tuesday

NEW YORK -- Citigroup Inc., the financial services giant, confirmed Wednesday that it was removing three senior executives in the wake of a banking scandal in Japan.

The bank released a memo from chief executive Charles Prince saying that Sir Deryck Maughan, a Citigroup vice chairman and head of Citigroup International, would be leaving the company. Also departing will be Thomas W. Jones, chairman and chief executive of the global investment management division, and Peter K. Scaturro, head of Citi's private bank, the memo said.

The move followed Japan's decision last month to order Citibank to close its private banking operations in the country.

Japan regulators charged that Citibank employees failed to prevent transactions that may have been linked to money laundering, extended loans used to manipulate publicly traded stock and misled customers about the risk of some products. Citibank is expected to submit a corrective action plan soon.

The ouster followed a review by an outside consulting group, the Wall Street Journal reported.

Three senior executives at Citigroup have been forced to resign as Charles Prince, the company's chief executive, works to improve the bank's reputation after its private banking operations were shut down in Japan last month. The resignations, which came Tuesday, were submitted by Deryck Maughan, the chairman of Citigroup's extensive international operations; Thomas Jones, the head of the bank's asset management division; and Peter Scaturro, the chief executive of private banking.
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Citigroup, the financial services giant, confirmed yesterday that it was removing three senior executives in the wake of a banking scandal in Japan. The bank released a memo from chief executive Charles Prince saying that Sir Deryck Maughan, a Citigroup vice- chairman and head of Citigroup International, would be leaving the company. Also departing will be Thomas W Jones, chairman and chief executive of the global investment management division, and Peter K Scaturro, head of Citigroup's private bank. The move followed Japan's decision last month to order Citibank to close its private banking operations in the country. Japanese regulators charged that Citibank employees failed to prevent transactions that may have been linked to money laundering, extended loans used to manipulate publicly traded stock and misled customers about the risk of some products. Citibank is expected to submit a corrective action plan within days.

Dateline: WASHINGTON
The Securities and Exchange Commission is considering recommending charges against two former Citigroup Inc. employees and a current employee, the financial-services giant said Friday.

The possible charges relate to the creation and operation of an internal transfer agent unit to serve primarily the Smith Barney family of funds, according to a Citigroup filing with the SEC.

The three include Thomas Jones, the former chief executive of Citigroup Global Investment Management. The other two employees were not identified in the filing.

An internal Citigroup memo issued Tuesday said that Jones would leave the bank along with Vice Chairman Deryck Maughan and Peter Scaturro, chief executive of Citigroup Private Bank. The memo was obtained by The Wall Street Journal.

The ouster followed a review by an outside consulting group of problems in Citigroup's private banking operations in Japan, which prompted Japanese regulators to close the operations, the paper said, citing an unnamed source close to the matter. The group found that all three departing executives shared blame for the problems.

One of the senior executives ousted from Citigroup this week over its regulatory problems in Japan is facing possible action by the US Securities and Exchange Commission (SEC) in relation to its mutual funds business.

The SEC has told Mr Thomas Jones, Citigroup's former head of investment management, it is considering recommending enforcement proceedings against him.

The possible action relates to the operation of an internal transfer agent unit that has been investigated by federal prosecutors, in addition to the SEC.

Last November, Citigroup said it had uncovered errors involving its entry into the transfer agent business, a back-office function that involves keeping records for mutual funds.

Citigroup said it had received a payment from a sub-contractor that should have been disclosed to the boards of its funds as part of their consideration of transfer agent arrangements.

The statement followed this week's ousting of Mr Jones along with Sir Deryck Maughan, chairman of Citigroup International, and Mr Peter Scaturro, head of Citigroup's private bank.

WHEN Charles Prince became chief executive of Citigroup, the world's biggest bank by market capitalisation, just over a year ago, he faced two challenges, both daunting: cleaning up the bank's reputation and stepping out of the shadow of his predecessor, Sandy Weill. In one move on October 19th, Mr Prince made notable progress in both.

Last month, Citigroup landed in hot water in Japan, where regulators accused its private bank of selling securities and derivatives at "unfair" prices to its clients and of having sloppy controls. Citigroup was told to shut down its private-banking activities there and was also suspended from underwriting Japanese government bonds. Mr Prince vowed, as chief executives often do, to take action. An investigation was launched, conducted by an outsider: Eugene Ludwig, a former top American bank regulator.

Last week, Mr Ludwig's report landed on Mr Prince's desk. Having already gone through the usual motions--sacking six employees in Japan, including the head of the private bank there, and cutting the pay of another eight--Mr Prince probably could have then wrapped up the incident with the usual blather about contrition.

Instead, he went much further. Mr Ludwig apparently faulted three senior employees: Sir Deryck Maughan, a vice-chairman, head of international operations and former chief executive of Salomon Brothers, the investment bank swallowed by Citigroup in the 1990s; Thomas Jones, head of investment management; and Peter Scaturro, Mr Jones's deputy and head of Citigroup's private-banking business. On October 19th a brief memo announced that all three would be leaving.

Given that Mr Ludwig fingered executives at head office, it may be that the mistakes in Japan were the product of a broad strategy that is now being rethought. Japan's regulators cited pressure from headquarters when they sanctioned the bank. Under Mr Weill, Citigroup developed a system of tight-knit top management, which meets weekly to go over the operations of the sprawling global empire in fine detail. The three departures may symbolise a change in direction under Mr Prince. A new team will take over important businesses, and there is little doubt that staying in the good graces of regulators everywhere will be an important part of their brief. There is also little doubt about who is now in control of Citigroup.
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Former Treasury official Sir Deryck Maughan was one of three senior executives sacked by banking giant Citigroup. The Citigroup international chairman - together with the head of investment management, Thomas Jones, and Peter Scaturro, head of the private banking arm - was ousted after a Japanese banking scandal.
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Dateline: TOKYO
Citigroup Inc. said Monday it will close its trust banking unit in Japan within a year, after Japanese authorities ordered the U.S. financial services giant to suspend its private banking business there.

Charles Prince, Citigroup's chief executive, apologized to Japanese authorities for the problems and said the company would appoint a new CEO for Citibank Japan.

Japan's Financial Services Agency last month suspended the private banking division of Citibank, a unit of New York-based Citigroup, and announced it would revoke its license after a year, effectively expelling it from the Japanese market.

The FSA accused the private bank, which manages the investments of wealthy individuals, of failing to implement safeguards against money laundering, misleading customers about financial risks, and other violations.

On Monday, Citigroup acknowledged that management at its private bank had "failed to establish a culture that ensured ongoing compliance with laws and regulations."

The trust banking unit, which handled product development for Citibank's private banking operations, would be closed within a year, Citigroup said.

Citigroup has dismissed 12 executives at Citibank in Japan over the scandal. Eleven other employees had their salaries reduced, and others were reprimanded, the company said.

Last week, Citigroup removed three senior New York-based executives in the wake of a banking scandal in Japan. They included Sir Deryck Maughan, a Citigroup vice chairman and head of Citigroup International; Thomas W. Jones, chairman and chief executive of the global investment management division, and Peter K. Scaturro, head of Citi's private bank.

Maughan, 56, had been with Citigroup or its predecessor companies since 1983. Jones and Scaturro were both members of the Citigroup management committee.

Prince told a news conference Monday he didn't believe global financial giant suffered similar problems to those found in Japan in other countries.He earlier met FSA Commissioner Hirofumi Gomi to apologize for the bank's inadequate governance and internal controls.

Prince also said Citigroup remains committed to the Japanese market and its business relationship with Japan's Nikko Cordial Corp. will stay intact.

Citigroup and Nikko Cordial, Japan's third-largest securities firm, have a wholesale securities joint venture, Nikko Citigroup Ltd. Citigroup is also a major shareholder in Nikko Cordial, though it recently said it would lower its stake in the Japanese brokerage house.
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This hasn't been a good year for Citibank. On Sept. 29, the company's wealth management office and three satellite offices in Japan were shut down after Japan's Financial Services Agency found instances of misconduct. Citibank was also banned from government bond auctions.

Immediately thereafter, South Korea announced a probe of the bank's wealth management business, though officials said the matter was unrelated to the problems in Japan. All this comes on the heels of a probe by the U.K.'s FSA into controversial bond trades in August; regulators in France and Germany are also said to be looking into that affair.

The situation in Japan has already led to two rounds of layoffs. In the first, Citibank fired six employees in the Japanese offices. Then, last week, Citibank followed that up by dismissing three of its most senior executives: Thomas Jones, CEO of Citigroup Asset Management; Peter Scaturro, CEO of Citigroup Private Bank and Vice Chairman Deryck Maughan.

Among the problems uncovered by the Japanese FSA in Citi's private banking practice was the lack of a system of internal controls over foreign currency deposits. The bank was also found to have skipped advance reviews of customers and transactions.

These practices also resulted in transactions with people about whom Citibank's other international locations had filed suspicious activity reports, as well as transactions that raised suspicions about money laundering connections. Additionally, bank employees used extreme sales tactics, like omitting risk explanations and important facts about customers' deposits and other financial products.

This wasn't the first time Citibank has been in trouble in Japan. The same private banking operation got handed a partial suspension order in 2001, and the practices that landed the group in trouble then were found to still be occurring when the FSA acted this time.

Last month, Japan's Securities and Exchange Surveillance Commission (SESC) held its own investigation into the problems at Citibank. The SESC found that two VPs lied to customers about the nature of structured bonds they were trying to sell. Employees at the same branch also offered to make or increase loans to customers on the condition that customers used the loan money to buy structured bonds.

Citibank had promised to make changes after 2001, and submitted a series of reports chronicling progress-all of which have turned out to be fake, said the FSA regulators in their report. And, according to regulators, bank employees continued to lie and stonewall during the 2004 inspection.

Something Happening Here

The Citibank affair is a classic case of global worst practices. The most important element of a successful global compliance program is commitment from the senior executives-whether the business in question is a small firm or global giant.

"The world is littered with examples where things go badly when senior management doesn't pay attention," says Stuart Kaswell, partner in the financial services group and head of the broker-dealer, financial institutions and market regulatory practice at Dechert LLP.

In fact, the FSA traced the source of some of Citibank's problems to the fact that its headquarters was setting exceedingly high annual sales targets-much larger than the previous years' actual sales figures-and then tying the compensation system and employee appraisals to these targets.

This, says Kaswell, is a recipe for disaster. "If management is not seriously committed to running a pure, clean shop, the rest is irrelevant," he said.

The NASD in particular has taken steps to address this issue, Kaswell notes, issuing a new rule last month requiring CEOs to certify compliance. "It's an indication of what regulators are trying to grapple with, that senior management has to be engaged."

Divide and Falter

The compliance function needs to have adequate staff and resources for the scope of the business, says Kaswell.

This wasn't the case at Citibank Japan, the FSA reports. According to the regulators, the management committee did not have the authority to direct and supervise the business operations, and there was no organization or staff to conduct self-inspections or audits.

Citibank is not unique in failing to keep the compliance function nicely separated from the business side, says Aamer Baig, partner with the financial services practice at management consultancy DiamondCluster International. "Having an independent risk- governance framework is a challenge," he said. "A lot of firms have risk management tied to the business."

This is, in fact, a significant theme in the new global regulatory order, said Baig. Sarbanes-Oxley addresses the issue of controls over financial reporting, and both Basel II and the consolidated supervision initiative deal with independence of the risk function.

"It makes sure that the person at the organization managing risk is not incentived by the same formula as someone incentived in growing sales," he said. "You need to separate the function of controlling risk."

Citigroup CEO Charles Prince took harsh steps last week to try to restore some luster to his bank's tarnished global reputation, firing three of Citi's top executives who all were linked to one degree or another to a scandal that came to light last month in the bank's private banking business in Japan.

"It is believed that his action was taken because these men directly or indirectly had responsibility for the division that was ordered to leave Japan, and the operation in London that was involved in the three-hour round-trip in the fixed-income markets," said Dick Bove, a senior analyst at Punk Ziegel & Co. "Both actions damaged further the company's credibility and that of Charles Prince, who had vowed that Citigroup would not be involved in problems of this nature."

The firing of the veteran executives-Deryck Maughan, vice chairman and head of the bank's international operations; Thomas Jones, chief executive of Citigroup Asset Management, and Peter Scaturro, chief executive of Citigroup Private Bank--sent a message to employees that anyone, in any post, would be held accountable, observers said.

Maughan, 56, oversaw Citi's operations in some 100 countries. Prior to Citigroup unifying its brand, he was chairman of Salomon Smith Barney. From 1992 to 1997, he led Salomon Brothers in the wake of that firm's Treasury-bond trading scandal. During the 1980s, Maughan ran Salomon's Japan operation and was credited with building a top-tier foreign securities house. Prior to entering the private sector, he was a British treasury official.

Jones, 55, had served as chairman and CEO of Citi's global investment management business since 1999. He oversaw its private bank and Travelers' Life and annuity businesses, along with its asset management operations. Jones, who also served on Citi's management committee, joined the bank via Travelers.

Scaturro, 44, was also part of Citi's management committee and was responsible for 129 private banking offices in 36 countries, including Japan.

Last month, Japanese regulators ordered Citigroup's private bank to close by next September, charging the bank with widespread wrongdoing, including failing to reject business the could be linked to money laundering, deceiving customers about the risk involved in financial products and tying loans to the acquisition of certain investments. This came only a month after Citi's London bond trading coup in August, which reaped the firm millions in profit but outraged rivals and sparked investigations by regulators across Europe.

The firings set off a hum of speculation at Citi about others that might follow. They also coincided with another departure by a senior executive.

Citi veteran Eduardo Mestre, 55, last week announced his retirement from the firm after 27 years to join merger advisory boutique Evercore Group. Mestre was named in 2001 to the newly formed position of chairman of investment banking to focus on client relationships and transacting deals. Prior to that, he was head of investment banking and was credited with building Salomon Smith Barney's telecommunications banking franchise. He joins Evercore as vice chairman to oversee its corporate advisory business.

Whether other Citi veterans will leave remains to be seen, but observers say that the firings put to rest stories that Prince has the title but not the power at Citi. Indeed, the recent moves and earlier reshufflings seem to point to him consolidating his power base.

"He could only have taken this action if he had the total support of the board of directors," Bove said. "Additionally, this move, along with putting Sally Krawcheck into place as CFO, moves people loyal to him into top management positions."

Prince tapped president and COO Robert Willumstad to oversee the businesses run by all three ousted executives. Beginning Nov. 5, the private bank will report to Todd Thomson, the current CFO, who is preparing to take over Citi's Smith Barney unit from Krawcheck.

Citigroup critics say that Prince's move was long overdue. They say that Citigroup's stock, which is selling at just under 10 times 2005 expected earnings, is lagging behind where it should be not for lack of business strength, but because of the bank's lack of credibility--and the fear that another situation will arise through lack of proper controls. Copyright 2004 Thomson Media Inc. All Rights Reserved.
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Oct. 25--Citigroup has submitted a business improvement plan to the Japanese banking regulator the Financial Services Agency (FSA), which last month revoked its private banking licence for serious breaches of regulations.

The group proposes to close its trust banking unit in Japan, Cititrust and Banking Corp, and establish a local committee to oversee operations in Japan.

It said the business improvement plan includes measures intended to strengthen the structure, management and compliance of Citibank Japan.

The banking group has moved quickly to try to neutralise the damage from the affair, which has cost British banker Sir Deryck Maughan and two other senior Citigroup executives their jobs.

"The proposed business improvement plan acknowledges that there were fundamental problems identified at Citibank Japan," Citigroup said in a statement.

It pledged to "undertake all necessary steps to finalise and fully implement the business improvement plan".

The Japanese regulator last month charged the company with violations such as misleading customers about the risks of their investments.

The bank may take further disciplinary action against employees involved.

It also disclosed that Thomas Jones, the former chief of Citigroup's global investment and asset-management units who left last week, may face civil charges in the US. He had received a notice from the Securities and Exchange Commission of possible charges over an investigation into its asset-management unit.

Charles Prince, Citigroup's chief executive, is meeting the FSA's chief, Hirofumi Gomi, to explain the regime the bank is introducing.

The scandal brought to an end Sir Deryck's glittering career as Britain's highest-placed banker in the US. He was responsible for overseeing mergers and acquisitions and the firm's cross-marketing activities and was also the Chairman of the Internet Operating Group and Citigroup Japan.

Prince has been trying to reassure investors. He said of the scandal: "It hurts all of us," adding: "Examples like that are simply not acceptable and we're taking very strong action -- we've taken some already, more to come."

The National Association of Securities Dealers has censured Citigroup Inc.'s global markets group and fined it $250,000 for distributing "inappropriate" marketing literature in its efforts to sell hedge fund investments.

On Monday the NASD said the action against Citi's Smith Barney broker-dealer division was its biggest enforcement to date involving hedge fund sales. The investment vehicles have exploded in popularity in the past few years as investors have searched for better returns.

This year the NASD fined UBS AG $85,000, citing similar reasons. It also imposed fines on Turner Investment Distributors ($100,000), Altegris Investments ($175,000), and an individual investment adviser.

Hedge funds are largely unregulated investment pools, but in recent years the entry barrier to individuals has been lowered, and endowments and pension funds have been taking positions in them. Regulators have expressed concern that broker-dealers, eager to catch a bigger piece of the business, are not adequately disclosing the risks. They also say some may be promoting funds that are clients or affiliates without disclosing the connection.

A Smith Barney spokeswoman said, "We took immediate action and cooperated fully with the NASD to ensure all materials comply with current NASD guidance."

The action concerns 100 pieces of literature sent by Citi financial consultants between July 1, 2002, and June 30, 2003. The NASD said the pamphlets "cited a targeted rate of return without providing a sound basis for evaluating the target, improperly used hypothetical returns in charts or graphs, and/or failed to include adequate risk disclosure."

Citi neither admitted nor denied the allegations but consented to the findings.

Also Monday, its chief executive, Charles Prince, appeared in Japan to talk to financial services regulators about a plan to revamp compliance and controls there. He apologized for breakdowns in account monitoring in its private bank there, which regulators ordered shut down last month.

Mr. Prince on a mission to drive home the message that managers need to be more diligent about compliance.

Deryck Maughan, the head of Citigroup International; Thomas Jones, the head of investment management; and Peter Scaturro, the head of private banking, all lost their jobs this month after an independent investigation concluded that the three executives were accountable for the breakdown in controls at the private bank.

On Monday, Mr. Prince said Citi's trust banking subsidiary in Japan would also shut down in connection with the private bank's closure.

Wire service reports from Tokyo, where Mr. Prince held a press conference Monday, quoted him as saying that the operational problems at the Japanese private bank were a result of short-term profits getting priority over long-term value.
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Poor old Citicorp can't put a foot right. Correction: rich old Citicorp. This week's fine - $250,000 for misleading investors in hedge funds - will not break the world's biggest provider of financial services, but it represents a bad habit. When the markets were blazing, Citi wandered too close to the flames, burning its fingers on WorldCom and Enron, losing billions and getting some expensive reputations dented. Undeterred, Citi raided Europe's bond markets and suffered more reputational damage. In Japan, Citi's private bankers provoked the hosts into withdrawing their licence. This in turn provoked Charles Prince, Citi's new chief executive, to order a purge whose victims included the head of Citigroup International, Sir Deryck Maughan. This rising star of Her Majesty's Treasury was lured away to Salomon Brothers, and Warren Buffett called on him to run it, greeting him as the lift doors opened and saying, 'You're tapped.' That was an earlier exercise in repairing reputations after serious damage. Then Citi paid a fortune for Salomon, and a new generation got up to new tricks, and now the name has been junked and the work must be done again. Markets, as Sir Patrick Sergeant says, are ruled by greed and fear - and greed's turn, for the moment, is over.

Sheriff Spitzer

The big winner from fear's turn is Eliot Spitzer. He rides into Wall Street with his silver star pinned to his chest, and the men in black hats flee, or fall from their horses. As New York's Attorney General, he has taken on its financial grandees, and Jeffrey Greenberg is only the latest. He was chairman and chief executive of Marsh & McLennan, insurance brokers to the world, until Mr Spitzer swooped, accusing Marsh Mac of a culture of covert commissions, knocking two fifths off its share price and inviting Mr Greenberg's resignation. In the same way as Mr Spitzer and in the same job, Rudolf Giuliani made his name as a financial crime-buster, went on to be mayor of New York and may still have higher aspirations. So, surely, has Mr Spitzer. Watch his speed when next the elections come round.
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The knights of England have been having a tough time of it in the upstart colony of America. Not so long ago, US companies seemed to feel that they had to have a titled Anglo on their board of directors.

What a nice sinecure it was while it lasted, with first-class travel and accommodation, a handy $50,000 or so a year in fees and a sackful of share options for showing up for a few meetings a year.

At the top of the executive ladder, the rewards were boundless. But now, under the litigious and punishing scrutiny of the post-Enron era, directorships and executive posts are a dicier proposition for all concerned.

The latest knight to discover how cold the winds can blow in this age of crusading New York Attorney General Eliot Spitzer, is Sir Deryck Maughan, who was dumped unceremoniously as vice chairman and head of international operations at Citigroup, the sprawling financial services group.

Maughan, 56, the first Brit on Wall Street to earn more than $10 million a year ([pounds sterling]5.4 million) is thought to have taken home more than $100 million in pay and perks over the past decade.

He was dismissed after regulators shut down Citigroup's private Japanese bank for allegedly duping wealthy investors and not doing enough to stop money laundering.

He is in distinguished company. Lord Wakeham's charger was shot from beneath him when Enron collapsed in 2001. A trained accountant, Wakeham served as a non-executive director on the company's audit and compensation-committee, but failed to notice the shenanigans undermining the $60 billion energy powerhouse.

Lord Ashcroft suggested his own departure from the board of Tyco International two years ago after it was discovered that former chief executive Dennis Kozlowski had been a mite generous with the company's money.

Kozlowski used company funds to pay for a $6,000 shower curtain and a $2 million birthday party for his wife on Sardinia, which Ashcroft attended.

Lord Black, the ennobled Canadian, last week finally agreed to step down from his executive positions at Hollinger Inc - the company which, through Hollinger International, owned the Daily Telegraph and Sunday Telegraph.

Black vehemently denies civil allegations that he and his colleagues pilfered $524 million ([pounds sterling]284 million) from the company.

And Lord Lang of Monkton and his fellow directors of Marsh & McLennan have ringside seats to an aggressive investigation by Spitzer, who alleges the world's biggest insurance broker ripped off clients by padding policy quotes.

No wrongdoing is alleged, but investors want to know why directors didn't know what was happening.

Anyone who suspects that having a titled Brit on the board of an American company ranks alongside bad omens such as naming sports stadiums after a brand or making a chief executive the highest-paid in the world will be watching carefully.

There are a few examples to choose from. Take Sir William Castell, who joined the board of General Electric last year, when he sold his life sciences company, Amersham, to the world's richest company by market value.

Sir Ian Prosser, former chairman of InterContinental Hotels, is a non-executive director at snack-maker Sara Lee. And former Wembley Stadium impresario Sir Brian Wolfson heads Natural Health Trends, a small US publicly-listed firm that sells cosmetics and organic products.

Given recent form, it might be worth watching out for fallen horsemen.

THERE was a certain irony in seeing strong quarterly figures from Playboy Enterprises on the day in which political analysts were pontificating that the re-election of President George W. Bush signalled a lurch toward religious 'family values'.

The empire, headed by 78-year-old Hugh Hefner, seems to have found that it can survive after all in an age when a glimpse of stocking (or Janet Jackson's breast) is looked on as something shocking. The bunny hopped its way back into the black thanks to a strong advertising rebound at 51-year-old Playboy magazine.

In fact, the company says it expects 2004 to be its first profitable year in six years.

This goes to show that even in a country strong on evangelism, an angel on a centrespread can still make the cash register sing.

Details have emerged from a preliminary report in October on Citigroup Inc.'s private banking operations in Japan.

On Wednesday, The Wall Street Journal quoted from the report, by former Comptroller of the Currency Eugene Ludwig. Citi commissioned his regulatory consulting firm, Promontory Financial Group, to look into what happened.

Japanese regulators revoked Citi's private banking license in Japan in September after unveiling a series of lapses in internal controls and compliance.

Mr. Ludwig's report indicates the problems that surfaced in Japan were more systemic at Citi, which has shorn up compliance reporting and management accountability since September.

Three senior executives, including Deryck Maughan, the chairman of Citi International; Thomas Jones, the head of Citi Asset Management; and Peter Scaturro, the chief at the private bank, were fired in October after the company received the confidential report.

"In our experience, we have found that problems of the magnitude that Citigroup is confronting in Japan often have a 'perfect storm' element to them. That was also true here," the report said, according to the Journal.

"However, experience also has taught us that a business failure of the kind witnessed in Japan is typically an indication of deeper fault lines in the control structure of the organization as a whole. This is also our conclusion here."

This year brought a tangle of regulatory and legal troubles to the nation's large banking companies, and no one predicts an easier 2005.

But maybe banks will be better prepared. Across the in-dustry in 2004, banking companies hired new compliance and risk management executives, brought in consultants to review governance practices, and installed new systems aimed at detecting trouble and complying with new reporting requirements.

Nancy Bush, who runs NAB Research LLC, in Annandale, N.J., sees the moves as part of a long-term trend. Regulatory burdens have been growing for a couple of decades, she said.

Nonetheless, she said, it was a "particularly active year" on regulatory issues, in part because of crackdowns by New York Attorney General Eliot Spitzer. Indeed, some of the biggest headlines involved costly settlements stemming from his investigation of trading practices in the mutual fund industry.

Bank mutual fund operations were under the microscope this year, targeted by state and federal regulators who said they had let hedge funds and others conduct questionable and sometimes improper trades in fund accounts, to the detriment of individual investors.

Loans and other corporate finance work for big companies involved in financial meltdowns over the past few years also continued to haunt banking companies, mainly in the form of potentially costly litigation. Some used 2004 to set aside eye-popping reserves to cover potential liabilities.

Federal anti-money-laundering rules landed several banking companies in hot water and spurred others to step up diligence. Meanwhile they are scrambling to comply with regulations that take effect at yearend to implement parts of the Sarbanes-Oxley Act of 2002.

"Clearly, it was a terrible year for banks, from a corporate governance standpoint," said Richard X. Bove, an analyst with Punk, Ziegel & Co. "Not only were banks fined and sued, but the net result of the fines and suits was a change in operating practices."

Nowhere was the trend more evident than at Citigroup Inc., which set aside $2.95 billion to settle with shareholders over the WorldCom Inc. bankruptcy and had to contend with embarrassments that tarnished its reputation.

The largest U.S. banking company is still under investigation by European regulators for a euro zone bond trade conducted by members of its London trading desk in August that roiled European government bond markets. Its private bank got kicked out of Japan in September after controls were found to be lax.

Chief executive Charles Prince fired three senior executives as a result, including Deryck Maughan, who was the head of Citi International; Thomas Jones, the head of Citi Asset Management; and Peter Scaturro, the head of the private bank. He vowed to clean up Citi's act. Mr. Prince was photographed bowing before Japanese regulators in a show of contrition.

In March, Bank of America Corp., which was named in Mr. Spitzer's 2003 complaint against the New Jersey hedge fund Canary Capital LLP, and FleetBoston Financial Corp., agreed to a combined $675 million in penalties and restitution to settle claims that their mutual fund businesses allowed improper mutual fund trades. The settlements with state and federal officials came two weeks before B of A bought Fleet for $47 billion.

Bank One Corp.'s mutual fund unit, also mentioned in the Canary complaint, agreed to a $90 million settlement in June. (J.P. Morgan Chase & Co. bought Bank One the next month.)

In February the Securities and Exchange Commission and the National Association of Securities Dealers announced disciplinary actions and settlements totaling $21.5 million with 15 firms for overcharging mutual fund customers who were eligible for discounts. Wachovia Securities, the brokerage division of Wachovia Corp. of Charlotte, drew the biggest penalty: $4.8 million.

This fall Mr. Spitzer announced a series of investigations of large insurance brokers and insurers and actions against them over alleged bid rigging. The controversy widened as other states followed suit. Bank-owned insurance divisions have begun getting inquiries from regulators, but so far there are no charges or settlements.

Ms. Bush said banking companies could feel more regulatory pressure in 2005 over their sales of nonbank products in general. "The whole area of sales practices, whether it be mutual fund sales practices or insurance product sales practices, is going to get a second look" from regulators, she said. "I don't see how that doesn't somehow shake out to the banking industry."

Accounting scandals at WorldCom and Enron Corp. were still dogging large banking companies in 2004. As complex lawsuits against them made their way through the courts, they set aside money to cover projected costs.

Citigroup announced in May that it would reserve nearly $5 billion to cover possible legal expenses and settlements related to its work for WorldCom and Enron. JPMorgan Chase has set aside roughly $4.7 billion for various kinds of litigation.

New accounting scandals also emerged. Citigroup and Bank of America were sued for $10 billion each by Italian food giant Parmalat Finanziaria SpA, which accused them of having played roles in the financial fraud that led to its bankruptcy in late 2003. Citi and B of A are among Parmalat's largest creditors.

Money laundering and the Bank Secrecy Act emerged as enforcement priorities. In an important turn of events, the crackdown involved not only bank regulators but federal and state law enforcement officials.

AmSouth Bancorp of Birmingham, Ala., announced in mid-October that it would pay $50 million in penalties for allegedly failing to report suspicious activity. The settlement involved a collection of regulators, including the U.S. attorney for the Southern District of Mississippi, the Federal Reserve, the Alabama Department of Banking, and the Treasury Department's Financial Crimes Enforcement Network.

Riggs National Bank of Washington was fined $25 million in May by the Office of the Comptroller of the Currency and Fincen for shortcomings in its compliance with anti-money-laundering rules. The regulatory heat seemed too much for Riggs, which found a buyer in PNC Financial Services Group in July, though the deal has yet to close.

"Clearly there has been a major intensification of anti-money-laundering and Bank Secrecy Act compliance," said banking lawyer H. Rodgin Cohen, the chairman of the New York firm Sullivan & Cromwell. "I think anyone would be Pollyanna-ish in the extreme if they thought this was over."

Mr. Cohen called the crackdown on money-laundering crimes and the involvement of nonbank regulators one of the "biggest issues" for banking companies now.

"A whole set of additional regulators, which consist of not only federal criminal enforcement authorities but also state criminal enforcement authorities," has added to the seriousness of the challenge, he said.

CEOs at most large banking companies have been grappling with new Sarbanes-Oxley requirements that will take effect Dec. 31. SunTrust Banks Inc. of Atlanta, for example, warned in November that errors in calculating loan-loss reserves for its indirect auto loan portfolio might make it difficult to comply with Section 404 of the act, which requires companies and their auditors to certify the effectiveness of internal controls.

It is unclear what the consequences might be for failing to comply.

The deadline is a critical milestone for all banks, and trying to prepare for it has cost SunTrust millions of dollars, said chairman, CEO, and president L. Phillip Humann on Dec. 7 at a Goldman Sachs & Co. conference.

What would happen if it missed the deadline? "I really don't have any idea," he said. "We don't have any experience to look toward."

Before Citigroup's top executives came to Japan in October to apologize for the missteps that had led regulators here to close the company's private banking group, they debated whether their chief executive, Charles Prince, should bow in public a common act of contrition in Japan but one that might not have been well received in the United States. In the end, Prince swallowed his pride, followed the custom and bent deeply from the waist, his eyes to the ground, after apologizing for several ethical lapses, including some that may have helped criminals to launder money.

Industry experts here said that there was nothing else he could have done that would have helped more to restore the bank's reputation and to send a clear message that Citibank is in tune with customs and ready to follow them. But despite what Eisuke Sakakibara, a professor at Keio University in Tokyo and a former vice finance minister for international affairs, called Prince's ''unprecedented'' bow, other analysts said Citibank was still far from getting back on track in Japan.

To regain the trust of regulators and customers, they say, the company must prove that it is doing everything it can to make sure it does not repeat the violations that led to one of the toughest penalties ever administered by Japanese regulators. And that may require more painful disclosures in coming months. As part of its rehabilitation, Citibank Japan recently assembled a team of 100 employees to pore over the records of its private bank in search of problematic transactions. The review, conducted with the guidance of Japanese regulators, could cause further embarrassment for Citibank if, as the regulators suspect, the bank uncovers additional cases of money laundering or other fraudulent activity that employees should have been guarding against.

The bank has until September to report to the authorities on the findings, but Douglas Peterson, the new head of Citibank Japan, told lawmakers recently that the company hoped to finish an investigation well before that deadline. Fourteen senior Citigroup executives in Tokyo and three in New York including Deryck Maughan, chairman of international operations have left or been fired because of the scandal.

In September, the Financial Services Agency ordered Citigroup to close its private banking business in Japan after finding that some bankers had misled customers about investment risks, sold products that it was not permitted to sell, and, most seriously, failed to take proper precautions to prevent money laundering and other illicit transactions. Since Prince's visit to Tokyo, Peterson apologized to the parliamentary finance committee, which on Nov. 30 grilled him about the violations at the private banking unit, which caters to people with more than 100 million, or $960,000, to invest.

Lawmakers scolded Peterson, the first foreigner ever to be called to appear before the Financial Affairs Committee of the upper house of Parliament. ''We are not a territory of the United States,'' Yoichi Masuzoe, a Liberal Democratic Party legislator, said. ''It's not acceptable to show the kind of arrogance whereby you do anything you please in Japan. We are an independent country and our rules are the rules.''

Peterson was contrite. ''Right now, the only thing I can do is to apologize,'' he said near the end of the tense session. ''The No.1 priority for us right now is to actually fix the problems.'' Citibank has not said whether it suspects any clients other than those already identified by regulators of involvement in illicit activity, but it has promised to report any suspicious transactions it uncovers.

''We are going through a thorough, thorough investigation,'' said Midori Kaneko, a Citibank Japan spokeswoman. ''It has to be 100 percent. We can't have any loose ends anymore.''

Financial industry experts said that Citibank should have been especially vigilant in screening potential customers at its private banking operation in Japan because of troubles the industry had faced in the past.

''Private banking in this country is very difficult because you may be dealing with the criminal element,'' said Sakakibara, the former Finance Ministry official. ''I'm not saying that all rich people in this country are shady, but a substantial portion of rich people in this country are engaged in some kind of shady business or a business that is in a gray area.''

While Citibank has 5,000 private-banking clients in Japan, the most by far of any bank, the unit accounts for only a small fraction of Citigroup's international business and its closure is not likely to have a noticeable effect on the company's profit. And so far, bank executives said, there is no sign the scandal is driving customers away from Citibank's core business in Japan of retail banking.

Still, the lapses clearly soured Citibank's relationship with regulators and lawmakers whose cooperation it will need when it wants to expand again. Toshihide Endo, director of the supervisory bureau of the Financial Services Agency, said that his agency had sometimes had to push Citibank to dig deeper into the problems but that so far the bank had responded well. ''I understand that people, if possible, don't want to engage in such a backward-looking business,'' he said. ''But this is a very important step for Citibank to rebuild trust in the Japanese market. Basically, we are satisfied, but we still may have something to say.''
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In the wake of a banking scandal in Japan, Citigroup Inc.'s most senior black manager has been forced out. Thomas W. Jones, chairman and chief executive of the global investment management division, resigned along with two other key New York executives: Citigroup Vice Chairman Sir Deryck Maughan and chief executive of its private bank, Peter K. Scaturro. Citigroup declined comment on the resignations beyond a memo sent to senior managers.

The world's largest financial institution closed its private banking operation in Tokyo after Japan's Financial Services Agency revealed that weak supervision had allowed Citibank workers to make improper transactions and mislead customers about financial risks, among other violations.

Jones, 55, oversaw $8 billion in business from Citigroup Asset Management, Private Banking, and Travelers Life & Annuity operations. One of BE'S Top 50 Blacks in Corporate America and a BE Wall Street All-Star, Jones once had been viewed as a possible successor to former Citigroup CEO Sandy Weill.

Corporate scandals have ruined the careers of many black executives in recent years and have also sent some to prison. But Jones' career won't be irreparably damaged unless regulators find that his involvement in the Japan scandal went beyond the fact that it happened on his watch, says David A. Thomas, professor of organizational behavior at Harvard Business School. Jones could not be reached for comment.
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Mr. Fischer, who also heads the public-sector services group at Citi, said Sunday that he had accepted an offer to become the governor of Israel's central bank.

Mr. Fischer, 61, joined the New York company in 2002 as the president of Citigroup International, which has since been reorganized. Before that he had spent seven years at the International Monetary Fund, most recently as first deputy managing director.

Mr. Fischer was once considered a contender to succeed William McDonough as the president of the New York Federal Reserve Bank. He will move to Israel and take up a five-year term as central banking head. The outgoing governor's term expires Jan. 16.

Mr. Fischer, who was born in Zambia, spent nearly his entire career in the public sector or in academia, including a professorship at Massachusetts Institute of Technology and a visiting professorship at Hebrew University.

Charles O. Prince, Citigroup's chief executive, said in a press release issued Sunday, "Stan has worked tirelessly to establish a strong public sector group, and we expect that group to continue to grow and develop." The group, which handles relationships with foreign governments, is part of the global corporate and investment bank.

Victor Menezes retired at the end of 2004 as senior vice chairman, ending 32 years at Citi.

In October, Citigroup announced the immediate departures of three senior executives after an independent review of problems that led to the revocation of Citi's private banking license in Japan. Those three were Deryck Maughan, the chairman of Citigroup International, Thomas Jones, the head of Citi Asset Management, and Peter Scaturro, the head of the private bank.
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This morning at 7:30 Eastern time, Citigroup Inc. employees worldwide were to learn from top management committee members via video about "the company we want to be."

The presentation was a prelude to a formal compliance and ethics training program that will begin March 1, according to a Valentine's Day memorandum to employees from chief executive officer Charles O. Prince.

For several months, in "town hall" meetings around the world, Mr. Prince has discussed ethics training with employees. The five-point program is a response to a series of embarrassing episodes last year, punctuated in September when Citi's private bank was booted out of Japan for lax account monitoring.

The CEO, who is the former top lawyer for the company, has made it clear that managers need to clean up their acts and be held accountable. In Monday's memo he urged employees to adopt a new attitude.

"Let me be very clear: To be the most respected company does not require a sea change in our culture," Mr. Prince said, referring to one of his goals. "Yet at times our actions have put at risk our most precious commodity -- the trust of our clients, the patience of our employees, and the faith of our shareholders."

Mr. Prince has promised to keep the company out of the headlines. In the fallout from the Japan scandal, three senior executives lost their jobs, including Sir Deryck Maughan, who was the head of Citi International; Thomas Jones, the head of its asset management unit; and Peter Scaturro, the head of its global private bank.

But despite Mr. Prince's efforts, flare-ups continue to happen. On Wednesday the Financial Times reported that Citi's dismissal last summer of its senior banker in China was prompted by the belief that she had submitted a fake document to the U.S. Securities and Exchange Commission.

On Tuesday a mistaken order by someone in Citi's capital markets group to buy and sell hundreds of thousands of option contracts at the Pacific Exchange briefly roiled stock markets. One day earlier France's treasury department rebuked Citi for a controversial euro-zone bond trade by its London fixed-income desk last summer that unsettled European bond markets.

The French treasury said it had lowered Citi's standing in its league table of primary dealers because of that trade, which is being investigated by German regulators for possible market manipulation.

Mr. Prince has called that trade "knuckle-headed" and an example of the behavior he wants to change.

On March 1 all employees will be required to watch a 25-minute documentary -- Citi is calling the event its world premiere of "The Story of Citigroup." Then everyone is to participate in a discussion of three "shared responsibilities," which Mr. Prince outlined as responsibilities to clients, each other, and the company.

All must attest that they have seen the movie and read the memo.

The details of the five-point plan make it clear that managers will be held more accountable.

Mr. Prince and his top lieutenants will be more hands-on in several aspects. The CEO will have a bi-monthly meeting with senior managers "to reinforce the importance of these initiatives," the memo said, and he will go on an annual world tour of Citigroup offices to meet with employees.

An independent global compliance group had been formed. Unsatisfactory results on risk control assessments, audits, or regulatory exams will be personally reviewed by Mr. Prince or Robert Willumstad, chief operating officer.

The company is also asking the 3,000 top managers to hold at least 25% of the shares they get for as long as they are managers. Already 120 of the top executives are required to hold at least 75% of their shares.

Mar. 18--The Fed took Citigroup to the woodshed for some of its recent scandals, and told the bank to fix its own problems before buying any more companies.

Citi, which had to close its private bank in Japan and faces charges of major market manipulations, was told to fix things at home before it "undertakes significant expansion," by the Fed.

Still, it did approve Citigroup's purchase of First American Bank in Texas, though that may be the last for awhile.

For a company that former CEO Sandy Weill built by making one blockbuster deal after another, the stop sign on big deals is a major blow, analysts said. But investors hardly noticed, with shares down 13 cents at $47.24.

This is "an extremely negative statement," said Richard Bove, a bank analyst at Punk Ziegel, who predicted the bank couldn't make a big purchase for at least a year. "It is a core part of Citigroup's business to grow by acquisitions and if they can't expand at this point, it is not good."

Run by former chief lawyer Chuck Prince, Citigroup faces allegations it roiled European bond markets with a series of questionable bond trades last summer and was told to close some operations in Japan for failing to guard against money laundering.

To be sure, Prince has taken steps to improve Citigroup's image and deal with these scandals.

In addition to negotiating legal settlements over WorldCom and Global Crossing, Prince fired three top-ranking execs -- including former Salomon Brothers head Sir Deryck Maughan.

Prince also created a five- point plan to prevent problems down the road and increase accountability.

"No major bank has made more efforts to clean up their act and tighten their controls," said John Coffee, a law professor at Columbia University. "Prince's number one priority is scandal avoidance."

In its warning to Citigroup, the Fed may be speaking to big banks in general, analysts said.

"It's a signal to everyone to get their house in order," said Nell Minow, the director of the Corporate Library. "That's exactly what the Fed is there to do."

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Of the three executives dismissed from Citigroup last fall in connection with the Japan private banking scandal, only one has emerged at another financial services firm.

Peter Scaturro, the former CEO of Citi's global private bank, was hired last week to be CEO of the U.S. Trust unit of Charles Schwab. Scaturro, who will also be a member of its executive committee, replaces Alan Weber, who is retiring. Scaturro's main task will be to grow the wealth-management business.

U.S. Trust, which has $139 billion in assets under management, "is absolutely confident in [Scaturro's] integrity, his ethics and his business acumen," a spokesman was quoted as saying. Prior to Citi, Scaturro logged time at Bankers Trust, both before and after its acquisition by Deutsche Bank.

Last September, Asian authorities ordered Citigroup to close its private banking operations in Japan after finding that Citi had failed to conduct proper checks against money laundering. That penalty led to a major housecleaning: In addition to Scaturro, CEO Charles Prince fired former Salomon Chairman Deryck Maughan, chairman of Citigroup International, and Thomas Jones, head of investment management. Citi also cancelled contracts for six other officers and issued formal reprimands to still more employees.

Maughan, 57, still has an active public life. In January, he was appointed to the audit committee of GlaxoSmithKline, where he has served as an independent director since June 2004. He is also a trustee of a number of cultural and educational institutions, including Carnegie Hall, Lincoln Center, the Japan Society, NYU Medical Center, the Trilateral Commission and British American Business Council. In addition, Maughan serves on the advisory board of the John F. Kennedy School of Government at Harvard University.

The British-born Maughan reportedly owns more than $70 million in Citigroup stock. Along with Warren Buffett, who acted as temporary chairman, Maughan is credited with the rebuilding of Salomon Brothers following the 1991 Treasury bond scandal, which led to the resignation of CEO John Gutfreund.

After Salomon's merger with Smith Barney, Maughan served as chairman and co-CEO of the new firm. He headed Citi's mergers and acquisitions group following Citi's acquisition of Salomon Smith Barney. From 1996 to 2000, Maughan was also vice chairman of the New York Stock Exchange. He spent 10 years at Britain's economics and finance ministry, HM Treasury, and four years at Goldman Sachs in London before coming to New York.

Of the three ousted Citi executives, only Jones has gone public with his side of the story. Jones told The Wall Street Journal last November that the Japanese private-banking operation that prompted his dismissal should have been flagged by auditors. He also said that the list of responsible executives named by an internal report on the private-banking problem did not include his name, and that he was identified only in two footnotes.

Jones could have his hands full should the SEC recommend a civil injunction and/or administrative proceeding against him. The SEC said it was considering such an action in January. The agency is also considering proceedings against Citigroup Asset Management and Citicorp Trust Bank. A call to Jones' lawyer, Stanley Arkin, was not returned by press time.

Sir Deryck Maughan, the former head of the international side of Citigroup, has been tipped to take over as chief executive of Morgan Stanley.

The Wall Street investment bank was plunged further into crisis last week when its chief executive, Philip Purcell, resigned after weeks of fighting with dissidents who had quit the company.

Headhunters Spencer Stuart were appointed to find a new chief executive, with the brief that none of the eight former senior executives who had clashed with Mr Purcell would be considered for the role. Another senior ex-Morgan Stanley executive, John Mack, who quit after clashing with Mr Purcell three years ago, and then briefly resurfaced running rival CSFB, was also ruled out.

Senior bankers have told The Independent on Sunday that Morgan Stanley needs to fill the void or face a damaging period without leadership. 'When there is a void at a top of a people business, the work suffers as everyone sits around speculating about the future, and this hits the bottom line badly,' said a rival banker.

Senior sources said that approaches had already been made to Sir Deryck, a Briton who came to prominence leading the restructuring of Salomon Brothers when it was embroiled in scandal in the 1990s.

The investment bank was later taken over by Travellers, which then merged with Citicorp, the world's largest bank, to form Citigroup. Sir Deryck, 57, was placed in charged of the international side of the giant group but was forced to quit after the group's Japanese business became involved in a financial scandal.

It is understood the US regulators have no problems in his taking a senior role. He is currently available and understood to be interested.

Other bankers with British connections are in the frame. Bob Diamond, the pounds 15m-a-year head of Barclays Capital and a former Morgan Stanley executive, has refused to rule himself out, while Larry Fink, the founder of asset manager BlackRock and a former head of the US arm of Royal Bank of Scotland, is also widely tipped.
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Two former executives within the asset management unit of Citigroup will fight Securities and Exchange Commission charges that they siphoned nearly $100 million from mutual fund investors through a finely executed, behind-the-scenes scheme involving a questionable transfer agent setup.

Last week, the SEC filed a long-anticipated enforcement action against former Citigroup Asset Management Chief Executive Officer Thomas W. Jones and the unit's former Senior Vice President, Chief Financial Officer and Fund Treasurer Lewis E. Daidone. The executives, nonetheless, claim that they acted in good faith and are characterizing the regulator's fraud charges as "unfounded and overreaching."

"Mr. Jones did not aid and abet any fraudulent activity during his watch," said Jones' attorneys G. Irvin Terrell, who represented President Bush in the 2000 election debacle, and James Doty, in a joint statement from the law firm Baker Botts in Houston.

"Mr. Jones oversaw a rigorous management process in the Citigroup Transfer Agency matter, supported by both experienced internal staff and external consulting experts," the statement indicated. "The record will demonstrate that [he] achieved substantial benefit for mutual fund shareholders and that he made every effort to fulfill his fiduciary duty to them. Mr. Jones is a victim of this situation, not a perpetrator of wrongdoing."

Daidone's attorney, Richard Morvillo of the Washington law firm Mayer Brown Rowe & Maw, did not return calls seeking comment. Morvillo, however, told the financial press when the news first broke last week that Daidone also "acted in good faith and with the advice of counsel."

Citigroup settled SEC fraud charges against its Citigroup Global Markets and Smith Barney Fund Management units over the alleged transfer agent windfall three months ago by distributing $208 million to investors (see MME 06/06/05). It neither admitted nor denied any wrongdoing. The company's only comment last week regarding Jones and Daidone was that its issues with the SEC "were settled in May of this year."

Other Run-Ins

This isn't Citigroup's only run-in with regulators, nor is it the only occasion where its powerful executives may have gone astray. Last fall, the NASD stuck Citigroup with a $250,000 penalty for distributing misleading information about its hedge funds (see MME 11/01/04), and in those same weeks, former Vice Chairman Deryck Maughan and private banking chief Peter Scaturro left amid a scandal at the firm's Japanese unit, where clients were allegedly misled in some private bond sales. That incident reportedly led to the ouster of Jones from Citibank. He now runs his own private equity fund.

The latest allegations of wrongdoing at Citigroup, however, point to an executive culture where company profit was placed ahead of shareholder interest, SEC officials said.

"We're looking to hold those individuals responsible for this conduct accountable," said James M. McGovern, senior trial counsel for the SEC Northeast Regional Office.

In short, Jones and Daidone led a successful initiative to create an affiliated transfer agent to serve the firm's Smith Barney family of mutual funds at steeply discounted rates. But, the SEC claims, "rather than passing the substantial fee discount on to the mutual funds, Citigroup took most of the benefit of the discount itself, reaping tens of millions of dollars in profit at the expense of mutual fund shareholders."

The SEC's case against Jones, 56, of New Canaan, Conn., and Daidone, 48, of Holmdel, N.J., seems to rest on two points. First, the executives knowingly disregarded advice from an outside consulting firm questioning the legality of their transfer agent idea, and, secondly, they crafted a presentation to the Smith Barney fund boards that disguised the windfall Citigroup would enjoy.

During the 1990s, SEC documents reveal, the Smith Barney funds used a division of Denver-based First Data as its full-service transfer agent. That contract was to expire in June 1999. First Data had been booking big profit margins on a "highly automated" business function, and the executives wanted Citigroup to reap those easy profits. So, in the spring of 1997, Jones ordered Daidone to begin negotiations on a deal that would make that scenario happen, the SEC says.

First, Deloitte & Touche Consulting was retained to comprehensively review the TA function. A Deloitte team worked on location at Citigroup Asset Management, using a conference room on the same floor as Daidone's office, the SEC documents indicate. Jones, meanwhile, received regular briefings on the project. As early as November of that year, Deloitte confirmed that, "First Data earns high margins" and there exists "a unique opportunity for Smith Barney to divert those profits to the firm."

Deloitte and Daidone quickly concluded that Citigroup Asset Management should create an affiliated TA of about 121 people and contract technology only with First Data, or rivals DST or SunGuard. DST was chosen in February of 1998 because, in part, First Data did not submit a bid. The windfall to the Citigroup unit was expected to be $40 million annually, the SEC says. But a month later, when it learned it might lose the contract, First Data offered a $25 million annual fee concession and use of its proprietary sub-accounting system.

Nearly $80M a Year

Citigroup passed on the offer, so First Data sweetened the deal by offering discounts measured as a percentage of the total annual fees First Data would receive from the funds. It would reach 40% by 2003, and Deloitte projected that the discounts could grow to $39 million annually. Deloitte, however, noted in a presentation to Citigroup executives late that month that "a true discount would go to the funds, not [the Citigroup TA]" and that "this relationship will be extremely difficult to sell to the fund boards."

Not completely sold, the Citigroup executives decided to still go forward with DST, but sometime in April 1998`, a higher-ranking executive with the firm instructed Jones to negotiate further with First Data. By June of that year, the First Data discount had grown to upwards of 60% and more than $80 million annually.

Deloitte, however, was skeptical, the SEC says. In a briefing later that month, the consultants questioned whether the proposed TA unit, which had shrunk to just 14 employees, could justify such big profits: "We anticipate a larger organization would be needed to satisfy the fund boards in the First Data scenario." They were also curious about the legality of the discount: "This legal structure is questionable at best. This arrangement would in no way be acceptable to the fund boards."

The executives ignored the warnings, the SEC says, and in late July of 1998, a recommendation was made from Daidone to Jones that they go forward with the First Data arrangement.

In February of 1999, Daidone began preparing a presentation on the TA proposal for the boards of the Smith Barney funds with the assistance of a Deloitte technology specialist. According to the SEC, Daidone told the Deloitte representative at various times that they had to "spin" the proposal to make it attractive to the funds' boards. The final presentation, regulators say, was materially misleading by failing to accurately disclose the fee discounts, the fact that the DST proposal was recommended by Deloitte, and it mischaracterized the Citigroup unit as sacrificing its own interests to benefit the funds.

By September of last year, the TA unit had contracted even further, the SEC says, and came to resemble nothing more than a call center staffed by seven people. But over a five-year period beginning in 1999, it earned net pre-tax revenues of about $104 million. A market downturn that began in 2001 is partly blamed for lower revenue than Citigroup previously projected.

Nonetheless, the SEC says, Jones and Daidone earned credit for generating that revenue. Therefore, the regulator is asking the courts to suspend or bar them from the industry, for each of them to disgorge their ill-gotten gains, and to pay a civil penalty and perhaps additional fines.
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Kohlberg Kravis Roberts, the firm that engineered the biggest-ever leveraged buyout, is now racing to catch up with rivals in the fight for Asian assets.

KKR opened a Hong Kong branch in September, seven months after a co-founder, Henry Kravis, said in an interview at a Frankfurt conference that he had no plans to establish an office in Asia.

Buyout funds are focusing on banks, insurers and computer-related companies in India and China as incomes rise in those nations and local business owners court overseas investors. Firms like Warburg Pincus and Carlyle Group invested $10.1 billion in Asia in the nine months to Sept. 30, up 40 percent from a year earlier, according to the Center for Asia Private Equity Research in Hong Kong.

''It's difficult to tell investors why you're not here in Asia,'' said Vincent Fan, a Hong Kong-based partner at Capital Z Investment Partners, which manages $2.3 billion in buyout and hedge funds. ''In the last two years, you've seen returns in the multiples of two to three, to six times.'' Competition for assets may drive up prices, Fan said.

Buyout firms are expanding into Asia as investors pour money into the funds in search of higher returns than those available in public stock and bond markets. The firms have raised $115 billion for acquisitions this year, almost double the $67 billion they collected in all of last year, according to Private Equity Intelligence, a London-based research company.

KKR, based in New York, set the record for buyouts with its $31.3 billion takeover of RJR Nabisco in 1989. It is arriving in Asia more than a decade after Warburg Pincus, also based in New York, opened a Hong Kong office in 1994.

Warburg Pincus has five partners and 11 investment executives in Hong Kong, Beijing and Shanghai. The team is led by Chang Sun, a former director of investment banking in Asia for Goldman Sachs Group, who joined Warburg Pincus in 1995. The firm also has offices in Seoul, Tokyo and Mumbai. KKR needs to be in the region and will face challenges finding the right investments, a founding partner, George Roberts, told the Washington State Investment Board last month. The board is the firm's biggest investor.

The firm will start raising a $10 billion global buyout fund next year, according to investors who plan to meet with KKR executives. Its previous fund, raised in 2001, generated returns of 50 percent annually, a partner, Mike Michelson, told the investment board.

Deryck Maughan, who oversaw international strategy at Citigroup until October 2004, is supervising KKR's Asian investments from New York. Citigroup's chief executive, Charles Prince, ousted Maughan after regulators shut the company's private bank in Japan.

KKR said this month that it had hired Michael Marks, the CEO of the Singapore-based electronics maker Flextronics International, to advise on Asia and technology investments. ''If we're going to do this, we can't do it from the States,'' Roberts told the Washington investment board. ''We're not going to run out and raise a fund right away. We can source that from our European and U.S. fund. We want to make sure we have the right people before we ask folks to give us money.''

Buyout firms typically use loans to finance about two-thirds of the price of their acquisitions. In most cases they improve the performance of the companies by cutting costs and sell them within five years.

Leveraged buyouts have risen to a record $247 billion this year, compared with $209 billion in all of last year, as low interest rates make it cheaper to finance purchases, data compiled by Bloomberg show.

By setting up offices in Asia, buyout firms also plan to gather information on how companies they already own can profit by buying raw materials and services in the region.* The Asian funds will focus on China, India and Japan, said J. Christopher Flowers, founder of the New York-based J.C. Flowers. The former Goldman Sachs partner was part of a team of investors who bought the bankrupt Long-Term Credit Bank of Japan in 2000 for 121 billion, or $1 billion

The group renamed the bank Shinsei, Japanese for ''new life,'' then raised $4.9 billion in an initial public offering in February 2004 and an additional share sale a year later.

''Markets outside India, Japan and China are small,'' said Flowers. ''They require a lot of brain power for small deals.

''KKR isn't the only latecomer to Asia. In July, the London-based Permira Advisers reversed its policy of investing solely in Europe, saying it would spend up to 150 billion to buy stakes in Japanese companies in the next three years.

Bain Capital of Boston, which has more than $26 billion in assets under management, plans to raise an Asia fund and is opening offices in Hong Kong, Tokyo and Shanghai.

''Some people want to take advantage of being the first mover and are willing to take the risk of being on the front line,'' said Hiromichi Mizuno, a partner at Coller Capital in London. ''KKR, Bain and Permira took a more conservative view on the market's development.''

''We're looking for bigger returns compared with Europe and America,'' said Christophe Florin, a managing director at AXA Private Equity in Singapore. The unit of the French insurer AXA invests directly and through funds managed by others.

Newbridge Capital, an Asian venture started by the U.S. buyout funds Texas Pacific Group and Blum Capital Partners, raised a $1.58 billion fund last month. Newbridge, based in San Francisco, plans to invest as much as 40 percent of the money in China and India. CVC Capital Partners of London raised $1.97 billion for its second Asian buyout fund in May.

''KKR, as new entrants, will find it difficult to compete with those guys,'' Mizuno said. ''They'll find it very difficult to get the deal-flow in the first year or so unless they find very good local people to help them.''

In the rush into the region, there is a danger that too many firms will chase the same assets, said Fan at Capital Z. ''All this money coming in is going to drive up valuations,'' he said. ''The weaker players will leave the table, and the smaller funds will find it difficult.''

Buyout firms also face competition from Asian companies, according to Daniel Carroll, a managing partner at Newbridge Capital. In June, South Korean investors bought the insolvent liquor company Jinro for 3.41 trillion won, or $3.4 billion, the country's biggest-ever acquisition. The buyers included the Seoul-based Hite Brewery, the Korean Teachers Credit Unit and a private equity fund of Korea Development Bank.

''Most of our competition is coming from strategic buyers,'' Carroll said. ''That was a competitive auction ultimately won by a strategic buyer with capital financing by a domestic pension fund, paying substantially more than the private equity community was prepared to pay for an excellent business.''

Kohlberg Kravis Roberts & Co., which is raising more than $10 billion for a new buyout fund, hired David Liu, the former co-head of Morgan Stanley's Asian private-equity unit, to lead its investment activities in China. Liu will be based in Hong Kong, where he worked for Morgan Stanley, KKR said Monday in a statement. The New York-based firm in October named Deryck Maughan, former vice chairman of Citigroup, to oversee its expansion in Asia.

Bank of America shows first profit decline in years

CHARLOTTE, N.C. - Bank of America Corp. posted its first profit decline in years Monday, missing Wall Street's expectations as consumer bankruptcies and weaker trading results cut into its fourth-quarter earnings. The Charlotte-based bank said net income for the quarter totaled $3.77 billion, or 93 cents per share, down from $3.85 billion, or 94 cents per share, a year earlier. Excluding merger and restructuring charges of $59 million before taxes from its acquisition of credit-card company MBNA Corp., Bank of America would have earned 94 cents a share in the latest quarter.
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Mayor Mufi Hannemann and Honolulu City Councilmen Gary Okino and Todd Apo completed their tour of Vancouver's Skytrain system yesterday and came away impressed with what they observed and inspected.

Officials from the Canadian government; Bombardier Transportation, Inc., which developed Vancouver's 20-year-old advanced rapid transit system, and TransLink, which operates it, briefed the three Honolulu officials. Skytrain is said to be the largest fully automated rail transit system in the world. The technology combines features found in conventional rapid transit such as subways and light rail coupled with the automation found in "people mover" systems. Skytrain operates on segregated rights of way free of any pedestrian or automobile crossings.

"Skytrain is a safe, clean and efficient system," said Mayor Hannemann. "As their ridership increases from 3 to 7 percent a year, they have managed to expand their system and operate it effectively. I especially like how they have successfully implemented an integrated bus and rail strategy. Over 50 percent of their transit passengers depend on the bus to connect them to Skytrain. This is the type of strategy I envision for Honolulu's multimodal transit system. We also witnessed first-hand the positive impact Skytrain has had on the economic and social development of the region, especially around the 32 transit stations. I see the same benefits accruing on Oahu once our system is in place." In preparation for development of a mass transit system for Oahu and to move the project along, Mayor Hannemann today announced the creation of a Transit Finance Advisory Committee to recommend creative ways to finance the project.

The committee will consist of these accomplished private-sector individuals:

"Work on an in-depth alternatives analysis for mass transit is already well underway, and we're confident it will result in a plan to develop a rail transit system as part of a multi-modal transportation system for Oahu," said Hannemann. "While much of the funding to underwrite this project will come from public tax revenues and federal appropriations, we hope this committee can identify opportunities for private investment and participation and any other avenues that would broaden financial support for this rail system. Successful systems I have seen thus far, like Vancouver, encourage public-private partnerships."

Mayor Hannemann is now en route to Washington, D.C., to participate in the 74th Winter Meeting of the U.S. Conference of Mayors. While in Washington, he will brief federal and Congressional officials about the status of Honolulu's transit project. At the end of the week, on his way home to Honolulu, he will stop in Las Vegas to examine that city's monorail system.

SIR John Bond, chairman of Vodafone and former chairman of HSBC, is joining private equity firm Kohlberg Kravis Roberts as a senior adviser. KKR was keen to get the experience banker on board because of his time spent building HSBC's business in China.

Last year it hired former Citigroup executive Sir Deryck Maughan as part of its drive to beef up the group's Asian division.

The appointment of Bond will spark speculation that KKR is planning big deals in the region.
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Kohlberg Kravis Roberts said that it had hired the former HSBC chairman John Bond as a senior adviser as the buyout firm targets more companies in Asia. Bond spent 45 years at HSBC before retiring as chairman this year. He spent more than 20 years in Asia before taking charge of HSBC's U.S. unit. There, he helped the former chairman William Purves turn the bank, which was established in 1865 to finance trade between China and Europe, into a global lender. ''As opportunities across Asia continue to emerge, John's strategic insight and unique network and relationships will bring tremendous value,'' Joe Bae, who runs KKR's business in Asia, said. KKR is buying companies in Asia, like Agilent Technologies' Singapore-based semiconductor unit, as competition in the United States and Europe makes it harder to repeat past returns.

Private equity firms raised more than $29.8 billion for Asian deals this year, and have spent $43.9 billion in the region, according to the Asian Venture Capital Journal. The firm opened its first offices in Asia last year, and hired Deryck Maughan, a former Citigroup vice chairman, to oversee the expansion.

Bae and Bond were not immediately available for comment. Bond stepped down in May after eight years as HSBC's chairman and more than five years as chief executive. He made $60 billion worth of acquisitions for the bank and increased HSBC's assets to $1.5 trillion as he expanded in China, Brazil, Mexico and Turkey. He is currently chairman of Vodafone Group, the world's largest cellphone company.
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In this week's issue, Chris O'Leary takes a look at the co-head phenomenon that seems to be unique to the financial industry (see page 16). While Chris was able to uncover three success stories, my question is, why are firms so intent on tempting fate in the first place?

With all of the egos involved, not to mention money, the very idea of appointing co-heads seems like a recipe for disaster. Just look at Citigroup's track record. Sandy Weill apparently pushed out his co-CEO John Reed, a marriage made through merger, and prior to their breakup, the pair collectively thought it would be a good idea push out Jamie Dimon.

(It should be noted that Dimon, currently the CEO of JPMorgan, had also shared a co-head title at Citi with Deryck Maughan and Victor Menezes.)

I'm not saying co-heads can't work. When you read Chris's story, you'll see there are clearly instances when they do, but the odds would seem to be stacked up against these arrangements.

Last week, for example, The Wall Street Journal carried a caption identifying the compensation of Merrill Lynch's two co-heads of investment banking. Since the two numbers were a full $3 million apart, it would seem a safe guess that one half of that tandem might be a bit chapped - even if he did take home $34 million last year.

Then there's the question of decision-making. As fast as the banking community moves today, how could it be more efficient to have two bosses instead of one?

Of course, the phenomenon lives on and continues to prove critics like myself wrong. In addition to the three cases Chris highlights in his story, Goldman Sachs has built its firm on the premise of shared power, and its record earnings last year attest that it's doing something right.

But it's still my guess that behind the scenes there is more to these arrangements than meets the eye, and the true success stories will be the exception as opposed to the rule.
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You never know who you'll meet when taking in a Broadway show. At a Palace Theatre performance of the Bette Midler-produced "Priscilla, Queen of the Desert," who should walk in but Mufi Hannemann and his New York-based sister, Vaofua "Va" Maughan, who is married to British financier Sir Deryck Maughan (so folks call her Lady Va). They sat right next to me and my wife.

"We're off to South Africa for a week," said Hannemann, the former mayor of Honolulu and currently president of the Hawaii Hotel and Lodging Association. A business trip? Nope, he was going as a tourist. ...
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WASHINGTON, DC -- The following information was released by FreedomWorks:

There are many troubling facts about Obama's nominee for Treasury Secretary, Jack Lew, but perhaps the most disturbing is his history with too-big-to-fail Citigroup. This should raise red flags for people for all political beliefs-it signals that Jack Lew would be just as corrupt as his predecessor Timothy Geithner.

According to the Wall Street Journal,

During the darkest days of the financial crisis Mr. Lew served as the chief operating officer of Citigroup's C +0.16% Alternative Investments unit (CAI). When Mr. Lew took this job in January 2008, the unit was already infamous for overseeing "structured investment vehicles" that hid mortgage risks outside Citi's balance sheet. It also housed internal hedge funds that were in the process of imploding.

CAI no longer exists. At the end of Mr. Lew's first quarter on the job, the unit reported a $358 million loss. Things got much worse after that but Citi stopped breaking out CAI results in its earnings releases. The unit was eventually shuttered and many of its assets were sold.

There probably weren't many laughs at Citi during the market panic in 2008. But if someone had said that a CAI executive would be the secretary of the Treasury within five years, the line would have brought the house down. That year the house almost really did come down, thanks to horrendous mortgage bets at CAI and other parts of Citigroup. The bank survived only with a series of taxpayer bailouts that provided $45 billion in cash, taxpayer guarantees on more than $300 billion of risky assets, tens of billions more in federal guarantees on Citi debt, plus cheap loans from the Federal Reserve.

And this guy was nominated to be Treasury Secretary?

To top it off, Jack Lew got a $945,000 bonus right after Citigroup was bailed out by taxpayers. Let this sink in, our hard earned money went to failing banks that made risky decisions so that they could line the pockets of their top executives.

During this time, Obama even called the Wall Street Bonuses "obscene" and shameful."

"That is the height of irresponsibility," President Obama said. "It is shameful. And part of what we're going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility."

And yet, Obama picked Jack Lew to be his Chief of Staff...

Jack Lew is not fit to be Treasury Secretary.
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